Emulex Announces Fiscal 2015 Second Quarter Results

COSTA MESA, Calif., Jan. 29, 2015 /PRNewswire/ -- Emulex Corporation (NYSE: ELX), a leader in network connectivity, monitoring and management, today announced earnings results for the second quarter of fiscal 2015 ending December 28, 2014.

Second Quarter Financial Highlights

• Total revenue of $111 million, above the high end of the initial guidance range, aided by strong sequential and year-on-year growth in Gen 5 (16Gb) Fibre Channel products.
• Non-GAAP diluted earnings of $0.24, up 14% year-on-year, and GAAP earnings of $0.06 as compared to a prior year loss of $0.05, both above their respective initial guidance range. 
• Non-GAAP operating margin of 18%, up 130 basis points year-on-year and 560 basis points sequentially, with GAAP operating income of $8 million as compared to an operating loss of $2 million in the prior year and operating income of $1 million in the prior quarter. 
• Cash, cash equivalents and investments at the end of the quarter of $185 million.

"The second quarter demonstrated continued progress with initiatives put in place at Emulex over the last 18 months, including the delivery of the broadest set of new Ethernet and Fibre Channel products in the Company's history, increased focus on execution, and a greater emphasis on fiscal discipline," commented Jeff Benck, president and CEO, Emulex. "Coupled with healthy demand for our Fibre Channel portfolio and share gains aided by accelerating adoption of our latest Gen 5 Fibre Channel products, we again exceeded the high end of our initial revenue and earnings guidance."  

"We look forward to building on this foundation with the broad slate of OEM wins for our latest 10Gb Ethernet products, designed for the new generation of x86 servers, that will ramp in the market over the next year," Benck concluded.

Business Outlook

Although actual results may vary depending on a variety of factors, including those listed in the Safe Harbor Statement below and our filings with the SEC, Emulex is forecasting total net revenues in the range of $97 - $103 million for the third quarter. The Company expects third quarter non-GAAP earnings of $0.11 - $0.15 and a GAAP loss of $0.06 - $0.10 per share.  GAAP estimates for the third quarter reflect approximately $0.21 per diluted share in expected charges arising primarily from amortization of intangibles, stock-based compensation, royalties, mitigation expenses and license fees associated with the Broadcom patent litigation, the accretion of debt discount on outstanding convertible senior notes, and the tax effects and the impact of our U.S. GAAP tax valuation allowance associated with these items.  Reconciliation between GAAP and non-GAAP results is included in the accompanying financial data.

Second Quarter Business Highlights

• Announced Emulex LightPulse® Gen 5 Fibre Channel target mode support for new DataCore SANsymphony-V10 software-defined storage platform
• Announced new Emulex Virtual Fabric Adapter 5 (VFA5) technology for new Lenovo Flex System server family, based on the latest Intel Xeon processor E5-2600/1600 v3 product families
• Network Visibility Products (NVP) Division unveiled NetPod™ application-aware network performance management (AA-NPM) solution based on a combination of Dynatrace Application Performance Management (APM) technology and Emulex Network Performance Management (NPM) capture technology
• Introduced Emulex ExpressConfig™ for OpenStack to accelerate deployment time, lower operational costs and increase Service Level Agreement attainment

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 net income and diluted earnings per share, (ii) non-GAAP gross margin, (iii) non-GAAP operating expenses, (iv) non-GAAP operating income. 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:

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.

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.

Site closure and other restructuring costs.  We have recognized expenses related to an organizational restructure including closure and consolidation of certain facilities, as well as severance and related costs.  We believe that exclusion of these expenses 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 expenses of this type may be incurred in future periods but are generally infrequent in nature.

Patent litigation damages, license fees and royalties related to the Broadcom patents. We have incurred expenses in the form of damages, sunset period royalties and settlement costs as a result of a judgment in a patent litigation proceeding with Broadcom and the related partial settlement and worldwide license agreement executed on July 3, 2012 (the Release Agreement).  We believe that exclusion of these costs of sales expenses related to the Broadcom patents 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 expenses of this type are generally unrelated to our core business and/or infrequent in nature but will continue in future periods.

Dismissal Agreement and mitigation expenses related to the Broadcom patents.  Effective March 30, 2014, we have entered into a Dismissal and Standstill Agreement (Dismissal Agreement) agreeing to pay Broadcom, a non-refundable, non-cancelable dismissal and standstill fee of $5 million.  We have recognized mitigation expenses related to the Broadcom patents.  We believe that exclusion of these operating expenses related to the Broadcom patents 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 expenses of this type are generally unrelated to our core business and/or infrequent in nature but will continue in future periods.

Expenses related to the acquisition of Endace Limited.  We have incurred various expenses in connection with our acquisition of Endace Limited including but not limited to legal fees, accounting fees, the mark-up on acquired inventory, severance costs and realized translation loss.  We believe that exclusion of these charges 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, as these expenditures do not reflect a continuing cost of operating our current core business.  In this regard, we note that expenses of this type relate to the acquisition of an operating business and, as such, are infrequent in nature but may occur in future periods in the event we make a material acquisition.

Expenses related to class action lawsuit.  We have incurred expenses related to a class action lawsuit.  We believe that exclusion of these expenses 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 expenses of this type are infrequent in nature.

Expenses related to IRS NOPA.  We have incurred various legal and accounting expenses related to the receipt and our response to the Notice of Proposed Adjustment (NOPA) received from the Internal Revenue Service in March of 2014.  We disagree with the IRS' proposed adjustments and the basis for its positions, and will administratively appeal to the IRS Appeals Office.  We believe that exclusion of these expenses 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 expenses of this type are infrequent in nature but will continue in future periods until these audits are resolved.

Accretion of debt discount on convertible senior notes.  We have accreted debt discount in connection with the convertible senior notes.  We believe that exclusion of this expense 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 expenses of this type are generally unrelated to our core business but will continue in future periods until maturity of the convertible senior notes.

Valuation allowance for U.S. federal and state deferred tax assets.  The Company has concluded that it is more likely than not that we will be unable to fully utilize the majority of our U.S. federal and state deferred tax assets.  As a result, the Company has previously recorded a valuation allowance against those assets to the extent that they cannot be realized through net operating loss carrybacks to prior tax years.  We believe that eliminating the impact of a discrete adjustment of this nature and its continuing impact on our effective tax rate is useful to management and investors in evaluating the performance of the Company's ongoing operations on a period-to-period basis and relative to the Company's competitors.  In this regard, we note that adjustments of this type are generally infrequent in nature.

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About Emulex

Emulex provides connectivity, monitoring and management solutions for high-performance networks, delivering provisioning, end-to-end application visibility, optimization and acceleration for the next generation of software-defined, telco and Web-scale data centers. The Company's I/O connectivity portfolio, which has been designed into server and storage solutions from leading OEMs and ODMs worldwide, enables organizations to manage bandwidth, latency, security and virtualization. The Emulex network visibility portfolio enables global organizations to monitor and improve application and network performance management. Emulex is headquartered in Costa Mesa, Calif. For more information about Emulex (NYSE:ELX) please visit http://www.Emulex.com.

"Safe Harbor" Statement

"Safe Harbor'' Statement under the Private Securities Litigation Reform Act of 1995: With the exception of historical information, the statements set forth above 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 actual future results could differ materially from those described in the forward-looking statements as a result of a variety of factors, including those discussed in our filings with the Securities and Exchange Commission, including our recent filings on Forms 10-K and 10-Q, under the caption "Risk Factors."  Those factors and the factors listed below could cause actual results to differ materially from those in the forward-looking statements:

• faster than anticipated declines in the demand for storage networking and fiber channel and slower than expected growth of the converged networking market or the failure of our Original Equipment Manufacturer (OEM) customers to successfully incorporate our products into their systems;
• the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions  and the emergence of new or stronger competitors as a result of consolidation movements in the market;
• our dependence on a limited number of customers and the effects of the loss of, decrease in or delays of orders by any such customers or the failure of our OEM customers to successfully incorporate our products into their systems;
• our reliance on a limited number of third-party suppliers and subcontractors for components and assembly, many of which are located outside of the United States;
• the effect on our margins of rapid migration of technology and product substitution by customers, including transitions from application specific integrated circuit (ASIC) solutions to boards for selected applications and higher-end to lower-end products, mezzanine card products or modular Local Area Network (LAN) on Motherboard (LOMs);
• the non-linearity and variability in the level of our revenue resulting from the variable and seasonal procurement patterns of our customers;
• the possibility that our goodwill could become impaired in the near term which would result in a non-cash charge and could adversely affect our reported GAAP operating results;
• any inadequacy of our intellectual property protection or our ability to obtain necessary licenses or other intellectual property rights on commercially reasonable terms;
• our ability to attract and retain key technical personnel;
• our ability to respond quickly to technological developments and to benefit from our research and development activities as well as government grants related thereto and delays in product development;
• intellectual property and other litigation against us, with or without merit, that could result in substantial attorneys' fees and costs, cause product shipment delays, loss of patent rights, monetary damages, costs associated with product or component redesigns and require us to indemnify customers or enter into royalty or licensing agreements, which may or may not be available;
• our dependence on sales and product production outside of the United States so that our results could be affected by adverse economic, social, political and infrastructure conditions in those countries;
• that we may fail to realize the anticipated benefits from the acquisition of Endace Limited (Endace) on a timely basis or at all which could result in an impairment of assets or be unable to complete the integration of Endace's technology into our existing operations in a timely and efficient manner;
• the effect of any actual or potential unsolicited offers to acquire us, proxy contests or the activities of activist investors;
• weakness in domestic and worldwide macro-economic conditions, currency exchange rate fluctuations or  potential disruptions in world credit and equity markets; terrorist activities, natural disasters, or general economic or political instability and any resulting disruption in our supply chain or customer purchasing patterns; and
• changes in tax rates or legislation, accounting standards and other regulatory changes.

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