Emulex Announces Preliminary Fourth Quarter And Full Fiscal Year 2012 Results

COSTA MESA, Calif., Aug. 9, 2012 /PRNewswire/ -- Emulex Corporation (NYSE:ELX) today announced preliminary results for its fourth quarter and full fiscal year 2012, which ended on July 1, 2012.

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Fiscal 2012 Financial Highlights

• Record net revenues of $501.8 million, an increase of 11% year-over-year
• Net revenues for our 10Gb Ethernet (10GbE)-based products increased over 70% year-over-year
• Repurchased $20 million of common shares during the first quarter of fiscal 2012
• Cash and investments increased $46.6 million to $229.9 million

Fourth Quarter Financial Highlights

• Net revenues of $129.0 million, an increase of 5% year-over-year
• Net revenues of 10GbE-based products grew more than 25% year-over-year
• Network Connectivity Products (NCP) net revenues of $88.0 million, or 68% of net revenues
• Storage Connectivity Products (SCP) net revenues of $32.8 million, or 26% of net revenues
• Advanced Technology and Other Products (ATP) net revenues of $8.2 million, or 6% of net revenues
• GAAP gross margins of 30% and non-GAAP gross margins of 64%
• GAAP operating loss of $25.5 million, or 20% of total net revenues, and non-GAAP operating income of $26.5 million, or 21% of total net revenues
• GAAP net loss of $28.8 million and non-GAAP net income of $23.2 million
• GAAP loss per share of $0.33 and non-GAAP diluted earnings per share of $0.26

Fourth Quarter Business Highlights

• Announced LightPulse® 16Gb Fibre Channel (16GFC) Host Bus Adapter (HBA) design wins with Dell for a broad range of Dell servers, storage and switches
• Announced LightPulse 16GFC HBA design wins with EMC Select for use with EMC storage arrays
• Introduced OneConnect® (OC)e12000 Network Xceleration™ family of 10GbE High Performance Networking (HPN) solutions that provide extreme performance for financial trading, cyber/network security, video streaming and digital content delivery, in partnership with Myricom
• Announced OneConnect 10GbE Network Xceleration solution with FastStack Sniffer10G™ increased system security for the latest release of the Open Information Security Foundation (OISF) open source Suricata engine and that Emulex is now an OISF Consortium member
• Joined the Network Intelligence (NI) Alliance, an organization created for collaboration around next-generation network intelligence solutions, including Emulex OneConnect Network Xceleration HPN solutions
• Named to CRN's 2012 Virtualization 100 list, an annual list published by UBM Channel's CRN that helps Solution Providers identify and evaluate virtualization products and programs
• Recognized as 'perfect quality supplier of the year' by Lenovo, an exclusive honor among Lenovo's server and storage providers, for providing high quality products and making significant contributions in achieving customer satisfaction with Lenovo products and solutions
• Appointed Beatriz Infante to the Emulex Board of Directors, bringing extensive executive management, leadership, and industry experience in developing and executing on successful growth strategies for companies in the telecommunications, server, and unified communications industries to the Emulex Board

Preliminary Financial Results

In the fourth quarter, total net revenues increased 5% from the comparable quarter of last year, and 3% sequentially reaching $129.0 million.  On a GAAP basis, Emulex recorded a net loss of $28.8 million, or $0.33 per share, compared to a GAAP net loss of $15.7 million, or $0.18 per share, in Q4 of fiscal 2011.  The fourth quarter preliminary results include a charge of $38.5 million related to the partial patent litigation settlement.  Non-GAAP net income for the fourth quarter was $23.2 million, or $0.26 per diluted share, representing a 62% increase from $14.4 million in the comparable quarter of the prior fiscal year.

CEO Jim McCluney commented, "2012 was our second consecutive year delivering double digit top line revenue growth. I'm proud of our team's execution to meet our corporate objective of record revenues for the year, exceeding $500 million for the first time in our more than 30 year history," continued McCluney.

"It's great to have so many OEMs now in production with our 16GFC technology, solidifying our time-to-market advantage over our nearest Fibre Channel competitor. With these wins and the momentum we have in the x86 market, we are well positioned to gain overall market share during the 16GFC transition, which is expected to account for 30% of all HBA port shipments in calendar 2013¹," McCluney concluded.

Business Outlook

Although actual results may vary depending on a variety of factors, many of which are outside the Company's control, including uncertainty related to the macro IT spending environment, the timing of new server launches by our customers, and the results and related costs of ongoing patent litigation, Emulex is providing guidance for its first fiscal quarter ending September 30, 2012.  For the first quarter of fiscal 2013, Emulex is forecasting total net revenues in the range of $118-$122 million.  The Company expects non-GAAP earnings per diluted share of $0.14-$0.16 in the first quarter.  GAAP estimates for the first quarter reflect approximately $0.13 per diluted share in expected charges arising primarily from amortization of intangibles, stock-based compensation and the royalties, mitigation expenses and license fees associated with the Broadcom patent litigation.  First quarter results will reflect the payment of the $58 million partial patent litigation settlement.  Of this settlement, $38.5 million was charged to the fourth quarter of 2012 and the balance will be amortized over the term of the license. 

¹Crehan Research Server-class Adapter & LOM/Controllers Long-range Forecast, July 2012

About Emulex

Emulex, the leader in converged networking solutions, provides enterprise-class connectivity for servers, networks and storage devices within the data center. The Company's product portfolio of Fibre Channel Host Bus Adapters, 10Gb Ethernet Network Interface Cards, Ethernet-based Converged Network Adapters, controllers, embedded bridges and switches, and connectivity management software are proven, tested and trusted by the world's largest and most demanding IT environments. Emulex solutions are used and offered by the industry's leading server and storage OEMs including, Cisco, Dell, EMC, Fujitsu, Hitachi, Hitachi Data Systems, HP, Huawei, IBM, Intel, NEC, NetApp and Oracle.  Emulex is headquartered in Costa Mesa, Calif., and has offices and research facilities in North America, Asia and Europe. Emulex is listed on the New York Stock Exchange (NYSE:ELX). News releases and other information about Emulex is available at www.Emulex.com.

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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 fourth 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.

Site closure related expenses.  We have recognized expenses related to closure and consolidation of certain facilities.  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.

Patent litigation settlement and royalties. 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 charges related to the Broadcom patent damages, sunset period royalties and Release Agreement are 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 this amount relates to a judgment in litigation and does not reflect a continuing cost of operating our core business.  In this regard, we note that expenses of this type are generally unrelated to our core business and/or infrequent in nature.

Mitigation expenses related to the Broadcom patents.  We have recognized mitigation expenses related to the Broadcom patents.  We believe that exclusion of these redesign, requalification and appeal 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.

Additional costs on sell through of inventory acquired in the ServerEngines acquisition. At the time of an acquisition, the inventory of the acquired company is recorded at fair value and subsequently expensed as sold.  We believe that the mark-up on acquired inventory does not constitute part of our core business because it generally represents costs incurred by the acquired company prior to acquisition and as such they are effectively part of transaction costs rather than ongoing costs of operating our core business.  In this regard, we note that once the acquired inventory is consumed the mark-up will not be replaced with cash costs and therefore, the exclusion of these costs provides management and investors with better visibility into the actual costs required to generate revenues over time.

Impairment of a strategic investment.  With respect to the exclusion of charges relating to the impairment of a strategic investment, we believe these types of charges are infrequent in nature and that they do not accurately reflect the ongoing costs of operation of our core business.  As a result, we believe that the exclusion of such charges gives management and investors a more effective means of evaluating its historical performance and projected costs.  In this regard, we note that charges of this nature are infrequent and are unrelated to our core business.

Impairment of in-process research and development.  We believe that the exclusion of charges relating to the impairment of in-process research and development 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 nature are infrequent and are unrelated to our core business.

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.  We believe such costs are generally unrelated to our core business and/or infrequent in nature.

Fair value adjustments on assets.  We have recognized a fair value adjustment in connection with a loan made to ServerEngines prior to the acquisition. We believe that exclusion of this adjustment 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 platform contribution transactions. We believe eliminating the discrete tax impact associated with the Company's recent globalization initiatives, including the platform contribution transactions (PCT) between one of our U.S. entities and a foreign subsidiary to license certain product technology, including the recently acquired ServerEngines technology, 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.

Valuation allowance for U.S. federal and state deferred tax assets.  As a result of the Company's current geographical mix of its business, 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 recorded a full 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 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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"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. These factors include intellectual property claims, with or without merit, that could result in costly litigation, cause product shipment delays, require us to indemnify customers, or require us to enter into royalty or licensing agreements, which may or may not be available. Furthermore, we have in the past obtained, and may be required in the future to obtain, licenses of technology owned by other parties. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations and financial condition could be materially adversely affected . Ongoing lawsuits, such as the action brought by Broadcom Corporation (Broadcom), present inherent risks, any of which could have a material adverse effect on our business, financial condition, or results of operations. Such potential risks include continuing expenses of litigation, risk of loss of patent rights and/or monetary damages, risk of further injunction against the sale of products incorporating the technology in question, counterclaims, attorneys' fees, incremental costs associated with product or component redesigns, and diversion of management's attention from other business matters. With respect to the continuing Broadcom litigation, such potential risks also include the adequacy of any sunset period to make design changes, the ability to implement any design changes, the availability of customer resources to complete any re-qualification or re-testing that may be needed, the ability to maintain favorable working relationships with Emulex suppliers of serializer/deserializer (SerDes) modules, and the ability to obtain a settlement which does not put us at a competitive disadvantage. In addition, the fact that the economy generally, and the technology and storage market 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. The current economic downturn and the resulting disruptions in world credit and equity markets that are creating economic uncertainty for our customers, as well as the storage and converged networking market as a whole, 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 these uncertainties, we are unable to predict our future results with any accuracy. Other factors affecting these forward-looking statements include but are not limited to the following: faster than anticipated declines in the storage networking market, 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; 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 such customers to make timely payments; the emergence of new or stronger competitors as a result of consolidation movements in the market; the timing and market acceptance of our products or our OEM customers' new or enhanced products; costs associated with entry into new areas of the server and storage technology markets; the variability in the level of our backlog and the variable and seasonal procurement patterns of our customers; 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 judgments; impairment charges, including but not limited to goodwill and intangible assets; changes in tax rates or legislation; the effects of acquisitions; the effects of terrorist activities; natural disasters, such as the earthquake and resulting tsunami off the coast of Japan in March 2011 and the significant flooding in various parts of Thailand in October 2011, and any resulting disruption in our supply chain or customer purchasing patterns or any other resulting economic or political instability; the highly competitive nature of the markets for our products as well as pricing pressures that may result from such competitive conditions; the effects of changes in our business 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 integrated circuit (ASIC) solutions for selected applications; a shift in unit product mix from higher-end to lower-end or mezzanine card products; a faster than anticipated 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; our ability to attract and retain key technical personnel; our ability to benefit from our research and development activities; our dependence on international sales and internationally produced products; changes in accounting standards; and any resulting regulatory changes on our business. 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 our recent filings on Forms 10-K and 10-Q, under the caption "Risk Factors."

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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.

SOURCE Emulex Corporation

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