Emulex Announces Second Quarter Fiscal 2011 Results

Emulex Corporation (NYSE:ELX) today announced results for its second fiscal quarter ended December 26, 2010.

Second Quarter Financial Highlights

• Total net revenues of $114.0 million, an increase of 11% sequentially and 5% year-over-year
• 10Gb/s Ethernet (10GbE)-based net revenues grew more than 35% sequentially, and accounted for over 10% of total net revenues for the quarter
• Host Server Products (HSP) net revenues were $92.2 million, or 81% of net revenues, an increase of 17% sequentially and 13% year-over-year
• 8Gb/s products exceeded 50% of HSP Fibre Channel net revenues for the quarter
• Embedded Storage Products (ESP) net revenues were $21.8 million, or 19% of net revenues, a decrease of 9% sequentially and 17% year over year
• GAAP gross margins of 56% and non-GAAP gross margins of 64%
• GAAP operating loss of $8.2 million, or 7% of total net revenues, and non-GAAP operating income of $12.5 million, or 11% of total net revenues
• GAAP net loss of $39.8 million and non-GAAP net income of $13.4 million
• GAAP loss per share of $0.46 and non-GAAP diluted earnings per share of $0.15
• Cash, cash equivalents and investments at the end of the quarter were $178.6 million

Business Highlights

• Captured over ten percent of the total 10GbE adapter and Local Area Network on Motherboard (LOM) revenue market share, according to the Dell'Oro Group's Q3 2010 Network Controller and Adapter report. Emulex now ranks second in overall 10GbE adapter and LOM ports, and third in total revenue for the September quarter.
• Began OEM sampling of the Pilot 3 integrated Baseboard Management Controllers (iBMC), an integrated lights-out management controller with a unique high performance triple core architecture that provides embedded platform management, high performance Keyboard Video and Mouse (KVM) console operation and high speed remote storage support
• Announced broad support of OneConnect? 10Gb/s Ethernet, iSCSI and Fibre Channel over Ethernet (FCoE) Universal Converged Network Adapters (UCNAs) and LightPulse® Fibre Channel HBAs on the new Red Hat Enterprise Linux 6 platform
• Introduced OneCommand? Guardian and OneCommand Key Manager, a comprehensive host-based encryption solution designed to provide a scalable cost-effective security for data in-flight and at-rest on servers using Emulex's OneSecure? Adapters or LightPulse® Fibre Channel Hosts Bus Adapters (HBAs)
• Announced support of the T10 Protection Information (T10-PI) standard to prevent silent data corruption and ensures the integrity and regulatory compliance of user data on Emulex LightPulse 8Gb/s Fibre Channel HBAs with its BlockGuard? feature

Financial Results

Total net revenues increased 11% sequentially and 5% from the comparable quarter of last year, reaching $114.0 million in the second quarter. Second quarter GAAP net loss was $39.8 million, or $0.46 per share, compared to a GAAP net loss of $8.1 million, or $0.10 per share, in the prior quarter, and GAAP net income of $8.9 million, or $0.11 per diluted share, reported in Q2 of fiscal 2010. Non-GAAP net income for the second quarter was $13.4 million, or $0.15 per diluted share. Non-GAAP net income increased 35% sequentially from the $9.9 million reported in the first quarter, but declined 7% from $14.3 million in the comparable quarter of the last fiscal year. Reconciliations between GAAP and non-GAAP results are included in the accompanying financial data.

CEO Jim McCluney commented, ?Our December quarter results were a strong finish for calendar 2010, which represents 20% revenue growth over 2009. Revenues were at the high end of our guidance and our gross margins improved sequentially as we began to realize the benefits from the recently completed ServerEngines acquisition.? ?Host Server Products sequential revenue growth of 17% was driven by share gains in our core Fibre Channel products and the continuing ramp of our 10GbE UCNAs and ULOMs, which are now over 10% of our revenues,? McCluney continued.

?With the next round of 10GbE server design activities well underway at our customers, we are well positioned to expand on the momentum that has been building over the past year,? concluded McCluney.

Business Outlook

Although actual results may vary depending on a variety of factors, many of which are outside the Company's control, including the timing of new server launches by our customers, Emulex is providing guidance for its third fiscal quarter ending March 27, 2011. For the third quarter of fiscal 2011, Emulex is forecasting total net revenues in the range of $108–$112 million. The Company expects non-GAAP earnings per diluted share could amount to $0.08–$0.11 in the third quarter. On a GAAP basis, Emulex expects a loss per share of $0.03–$0.06 in the third quarter. GAAP estimates for the third quarter reflect approximately $0.14 per diluted share in expected charges arising primarily from amortization of intangibles and stock-based compensation.

About Emulex

Emulex is the leader in converged networking solutions for the data center. Our Connectivity Continuum architecture provides intelligent networking services that transition today's infrastructure into tomorrow's unified network ecosystem. Emulex provides a single framework that intelligently connects every server, network and storage device within the data center. Through strategic collaboration and integrated partner solutions, Emulex provides its customers with industry leading business value, operational flexibility and strategic advantage. Emulex is listed on the New York Stock Exchange (NYSE:ELX) and has corporate headquarters in Costa Mesa, California. News releases and other information about Emulex Corporation are available at http://www.emulex.com.

Note Regarding Non-GAAP Financial Information

To supplement the condensed consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), we have included the following non-GAAP financial measures in this press release or in the webcast to discuss our financial results for the second fiscal quarter which may be accessed via our website at www.emulex.com: (i) non-GAAP gross margin, (ii) non-GAAP operating expenses, (iii) non-GAAP operating income, (iv) non-GAAP net income, and (v) non-GAAP diluted earnings per share. These non-GAAP financial measures exclude certain expenses and reflect an additional way of viewing aspects of our operations that, when viewed with the GAAP results and the reconciliations to corresponding GAAP financial measures, provide a more complete understanding of our results of operations and the factors and trends affecting our business. However, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. We use our non-GAAP financial measures internally to better understand and evaluate our business, prepare annual budgets, and in measuring performance for some forms of compensation.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

Stock-based compensation. Although stock-based compensation represents an important part of incentive compensation offered to our key employees, we believe that exclusion of the impact of stock-based compensation assists management and investors in evaluating the period over period performance of our business operations and in comparing our performance with those of our competitors. Stock-based compensation expense will recur in future periods.

Amortization of intangibles. Amortization of intangibles generally represents costs incurred by an acquired company or other third party to build value prior to our acquisition of the intangible assets. As such, it is effectively part of the transaction costs of the acquisition rather than ongoing costs of operating our core business. As a result, we believe that exclusion of these costs in presenting non-GAAP financial measures provides management and investors a more effective means of evaluating its historical performance and projected costs and the potential for realizing cost efficiencies within our core business. Amortization of intangibles will recur in future periods.

Severance and associated costs. We have incurred severance and certain related costs in connection with the change in employment status of certain employees, including terminations resulting from elimination of certain positions. We believe that the exclusion of such severance and related costs from the relevant non-GAAP financial measures enables management and investors to more effectively evaluate historical performance and projected costs. While severance and associated costs are generally infrequent in nature, we may incur severance or associated costs in response to changing economic conditions or in connection with acquisitions.

Broadcom's unsolicited takeover proposal and related litigation costs. We believe that exclusion of charges related to Broadcom's unsolicited takeover proposal and related litigation costs is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors. While such costs will continue until our outstanding litigation with Broadcom has been resolved, such costs are generally unrelated to our core business and/or infrequent in nature.

Fair value adjustments on assets. We have recognized fair value adjustments in connection with certain assets. We believe that exclusion of these adjustments is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors. In this regard, we note that adjustments of this type are infrequent in nature.

Tax impact associated with the option exchange. During the first quarter of fiscal 2010 we completed a shareholder approved exchange of options for restricted stock which resulted in a tax benefit. We believe the exclusion of the tax benefit related to this option exchange is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors. In this regard, we note that charges of this type are infrequent in nature.

Charges related to PCT of ServerEngines Intangibles. During the second quarter of fiscal 2011 one of our US entities entered into a platform contribution transaction (PCT) with one of our international subsidiaries to license the recently acquired ServerEngines technology. We believe the exclusion of the tax impact related to this PCT is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors. In this regard, we note that charges of this type are infrequent in nature.

Timing difference due to using an actual interim effective tax rate versus an annualized effective tax rate. Although for fiscal year 2010, we used an actual interim effective tax rate instead of an annualized effective tax rate in calculating GAAP net income, we believe that eliminating the tax impact associated with this timing difference is useful to management and investors in evaluating the performance of our ongoing operations on a period-to-period basis and relative to our competitors. In this regard, we note that a similar adjustment may recur in future periods when the use of an annualized effective tax rate would be distortive.

"Safe Harbor'' Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the statements set forth above, including, without limitation, those contained in the discussion of ?Business Outlook? above, and the reconciliation of forward-looking diluted earnings per share below, contain forward-looking statements that involve risk and uncertainties. We expressly disclaim any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. The fact that the economy generally, and the technology and storage segments specifically, have been in a state of uncertainty makes it difficult to determine if past experience is a good guide to the future and makes it impossible to determine if markets will grow or shrink in the short term. Disruptions in world credit and equity markets and the resulting economic uncertainty for our customers and the storage networking market as a whole has resulted in a downturn in information technology spending that has and could continue to adversely affect our revenues and results of operations. Furthermore, the effect of any actual or potential unsolicited offers to acquire us may have an adverse effect on our operations. As a result of this uncertainty, we are unable to predict with any accuracy what future results might be. Other factors affecting these forward-looking statements include, but are not limited to, the following: slower than expected growth of the storage networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems; our dependence on a limited number of customers and the effects of the loss of, or decrease or delays in orders by any such customers, or the failure of such customers to make payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our or our OEM customers' new or enhanced products; unexpected costs associated with entry into new markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; impairment charges, including but not limited to goodwill, intangible assets and equity investments recorded under the cost method; changes in tax rates or legislation; the effects of terrorist activities, natural disasters and resulting political or economic instability; the highly competitive nature of the markets for tour products as well as pricing pressures that may result from such competitive conditions; any inability to successfully implement changes in our revenue model to separately charge for software; the effect of rapid migration of customers towards newer, lower cost product platforms; possible transitions from board or box level to application specific computer chip solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a decrease in the average unit selling prices or an increase in the manufactured cost of our products; delays in product development; our reliance on third-party suppliers and subcontractors for components and assembly; any inadequacy of our intellectual property protection and the costs of actual or potential third-party claims of infringement and any related indemnity obligations or adverse judgements; our ability to attract and retain key technical personnel; our ability to benefit from research and development activities; our dependence on international sales and internationally produced products; the effect of acquisitions; including the recent acquisition of ServerEngines; changes in accounting standards; and the potential effects of global warming and any resulting regulatory changes on our business. We have and will incur charges associated with the acquisition of ServerEngines. As the valuation and purchase price allocation has not been finalized, we are unable to predict the impact of various post-acquisition charges, including amortization of intangibles and stock-based compensation. These and other factors could cause actual results to differ materially from those in the forward-looking statements and are discussed in our filings with the Securities and Exchange Commission, including its recent filings on Forms 10-K and 10-Q, under the caption ?Risk Factors.?

This news release refers to various products and companies by their trade names. In most, if not all, cases these designations are claimed as trademarks or registered trademarks by their respective companies.

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Emulex Corporation
Investor Contact:
Frank Yoshino, 714-885-3697
Vice President, Finance
frank.yoshino@emulex.com
or
Press Contact:
Katherine Lane,714-885-3828
Director, Corporate Communications
katherine.lane@emulex.com