EX-99.01 2 a22970exv99w01.htm EXHIBIT 99.01 exv99w01
 

EXHIBIT 99.01
(EMULEX LOGO)
FOR IMMEDIATE RELEASE
     
Investor Contact: Michael J. Rockenbach
  Press Contact: Robin Austin
Chief Financial Officer
  Director, Public Relations
(714) 885-3695
  (714) 885-3462
EMULEX REPORTS PRELIMINARY FOURTH QUARTER AND FISCAL 2006 RESULTS
Emulex Achieves its Eighth Consecutive Year of Revenue Growth
 
     COSTA MESA, Calif., August 10, 2006 — Emulex Corporation (NYSE:ELX) today announced preliminary results for its fourth fiscal quarter ended July 2, 2006.
Fourth Quarter Highlights
  •   Revenues of $98.9 million, at the top end of April guidance of $96-$99 million, an 11% sequential increase.
 
  •   Next-generation 4 gigabit per second (Gb/s) solutions expanded over 85% sequentially to 21% of total revenues.
 
  •   Switch port shipments exceeded 2 million ports for the quarter, expanding to approximately 14 million ports to date.
 
  •   GAAP gross margins of 59% and non-GAAP gross margins of 63%.
 
  •   GAAP operating income of $15.5 million, or 16% of revenue. Non-GAAP operating income of $27.7 million, or 28% of revenue.
 
  •   GAAP diluted EPS of $0.14 and non-GAAP diluted EPS of $0.24.
 
  •   Cash and investments, net of debt, of $363.3 million.
 
  •   Inventory turns improved to 7.3 and inventory decreased by $8.1 million.
 
  •   Days Sales Outstanding (DSOs) of 41 days.
 
  •   Completed acquisition of Aarohi Communications using $32.3 million in cash for the purchase of all common and preferred stock.
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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     Results are preliminary, pending completion of the valuation of intangibles and deferred tax assets and the purchase price allocation analysis associated with the acquisition of Aarohi Communications, which is currently ongoing. This purchase price allocation is expected to result in the identification of in-process research and development which would be expensed immediately, and additional expense associated with the amortization of intangibles.
     Financial Results
     Fourth quarter revenues of $98.9 million, essentially all of which were comprised of Fibre Channel products, rose 11% sequentially from the third fiscal quarter and decreased 9% from a year ago. Preliminary fourth quarter GAAP net income of $12.7 million, or $0.14 per diluted share, represented an increase in net income of 9% sequentially. GAAP net income decreased 50% from the comparable year-ago results, primarily due to an increase in stock-based compensation expense resulting from the adoption of SFAS 123R. Non-GAAP net income for the fourth quarter, which excludes amortization of intangibles and stock-based compensation, was $21.5 million, or $0.24 per diluted share, representing an increase of 11% sequentially. Reconciliations between GAAP and non-GAAP results are included in the accompanying financial data.
     Paul Folino, Chairman and CEO of Emulex, stated, “We experienced very strong quarter-over-quarter sequential revenue growth in the fourth quarter as we made significant progress in our key product transitions. During the quarter, we expanded our total 4 Gb/s design wins to 93 and accelerated 4 Gb/s revenue to 21% of total revenue. We also reached significant milestones in the 4 Gb/s blade server market with the final certification and launch of several new product offerings at IBM, Hewlett Packard and Dell, which represent new market and revenue opportunities for Emulex as we look to the future.”
     “With the completion of the acquisition of Aarohi Communications, representing our Intelligent Network Products (INP), we have added another core building block to our diversification strategy. The INP family of products provides a high performance multi-protocol platform for next generation Fibre Channel and Ethernet solutions with link speeds of up to 10 Gb/s,” said Jim McCluney, President and COO of Emulex. “With our expanding customer base, multi- protocol product offerings, and a world-class development team spanning both the U.S. and India, we believe we are well-positioned for growth and expansion in fiscal 2007”.
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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     For the full year, record revenues of $402.8 million represented a 7% increase over the prior year, resulting in our eighth consecutive year of revenue growth. On a GAAP basis, preliminary diluted EPS for fiscal year 2006 was $0.65 compared to $0.80 in the prior year primarily due to the adoption of SFAS 123R as of the beginning of fiscal year 2006, which increased stock-based compensation expense. Non-GAAP fully diluted EPS was $1.01 for the year, compared to $0.86 in the prior year, representing a 17% increase.
Business Outlook
     Although actual results may vary depending on a variety of factors, many of which are outside Emulex’s control, Emulex is providing guidance for its first fiscal quarter ending October 1, 2006. While the summer quarter is typically seasonally soft, Emulex believes that with revenue contribution from new customers and 4 Gb/s programs, it will have the opportunity to grow revenue up to 2% sequentially. As a result, Emulex is budgeting for first quarter revenue in a range of $98-$101 million. Emulex expects that non-GAAP gross margins will likely remain near fourth quarter levels of 63%, and non-GAAP earnings per share could amount to $0.22-$0.24. On a GAAP basis, Emulex expects diluted first quarter EPS of $0.11-$0.13 per share, reflecting approximately $0.11 per share in expected GAAP charges arising primarily from amortization of intangibles and stock-based compensation. Additionally, Emulex will incur charges associated with the acquisition of Aarohi Communications, including additional stock-based compensation, amortization of intangibles and in-process research and development. However, as the valuation and the purchase allocation are not yet complete, Emulex is unable to predict the impact on its GAAP earnings per share at this time.
Webcast Information
     Emulex will host a webcast today at 2:00 p.m. Pacific time to discuss the financial results in detail. The webcast may be accessed live via the home page of the Emulex website at www.emulex.com. During the call, Emulex will discuss details of the fourth fiscal quarter financial results. A replay of the webcast will be available in the audio archive section of the investor relations page of the Emulex website. In addition, a replay of the quarterly conference call will be available for 48 hours by calling (888) 203-1112 — and using the passcode 6879124.
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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About Emulex
     Emulex Corporation is the most trusted name in storage networking connectivity and a leading provider of critical building blocks for intelligent data center infrastructure solutions. The world’s leading server and storage providers rely on Emulex award-winning HBAs, embedded storage switching, intelligent storage platforms and I/O controller products to build reliable, scalable and high performance storage and server solutions. Emulex ranked number 19 in the Deloitte 2005 Technology Fast 50 and is listed on the New York Stock Exchange (NYSE:ELX). Corporate headquarters are located in Costa Mesa, California. News releases and other information about Emulex Corporation are available at http://www.emulex.com.
EMULEX | We network storage
 
Note Regarding Non-GAAP Financial Information. To supplement the consolidated financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company has included the following non-GAAP financial measures: (i) non-GAAP gross margin, (ii) non-GAAP operating expenses, (iii) non-GAAP operating income, (iv) non-GAAP net income, and (v) non-GAAP earnings per share. Each of these non-GAAP financials are adjusted from results based on GAAP to exclude certain expenses. As a general matter, the Company uses these non-GAAP measures in addition to and in conjunction with results presented in accordance with GAAP. Among other things, the Company uses such non-GAAP financial measures in addition to and in conjunction with corresponding GAAP measures to help analyze the performance of its core business, in connection with the preparation of annual budgets, and in measuring performance for some forms of compensation. In addition, the Company believes that non-GAAP financial information is used by analysts and others in the investment community to analyze the Company’s historical results and in providing estimates of future performance and that failure to report these non-GAAP measures, could result in confusion among analysts and others and a misplaced perception that the Company’s results have underperformed or exceeded expectations.
These non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s operations that, when viewed with the GAAP results and the reconciliations to corresponding GAAP financial measures, provide a more complete understanding of the Company’s results of operations and the factors and trends affecting the Company’s 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.
The non-GAAP disclosures and the non-GAAP adjustments, including the basis for excluding such adjustments and the impact on the Company’s operations, are outlined below:
     Non-GAAP gross margin. Non-GAAP gross margin excludes the effects of amortization of intangibles and stock-based compensation. Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company are valued and amortized over their estimated lives. The Company believes that such intangibles do not
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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constitute part of its core business because they generally represent costs incurred by the acquired company to build value prior to acquisition and as such they are part of transaction costs rather than ongoing costs of operating the Company’s core business. In this regard, the Company notes that (i) once the intangibles are fully amortized, they generally 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, and (ii) although the Company sets the amortization expense based on useful life of the various assets at the time of the transaction, the Company cannot influence the timing and amount of the future amortization expense recognition once the lives are established. As a result, the Company believes that exclusion of these amortization costs in presenting non-GAAP gross margin and other non-GAAP financial measures gives management and investors a more effective means of evaluating its historical performance and projected costs and the potential for realizing cost efficiencies within its core business. Similarly, the Company believes that presentation of a gross margin and other non-GAAP measures that exclude the impact to gross margins of stock-based compensation expense assists management and investors in evaluating the period over period performance of the Company’s ongoing core business operations because the expenses are non-cash in nature and, although the size of the grants is within the Company’s control, the amount of expense varies depending on factors such as short-term fluctuations in stock price and volatility which can be unrelated to the operational performance of the Company during the period in question and generally is outside the control of management during the period in which the expense is incurred. Moreover, the Company believes that the exclusion of stock-based compensation in presenting non-GAAP gross margins and other non-GAAP financial measures is useful to investors to understand the impact of the expensing of stock-based compensation to the Company’s gross margins and other financial measures in comparison to both prior periods as well as to its competitors.
     The Company believes disclosure of non-GAAP gross margins has economic substance because the excluded expenses do not represent current cash expenditures and, as described above, the Company has little control over the timing and amount of the expenditures in question. A material limitation associated with the use of this measure as compared to the GAAP measure of gross margin is that it may not be comparable with the calculation of gross margin for other companies in the Company’s industry. The Company compensates for these limitations by providing full disclosure of the effects of this non-GAAP measure, by presenting the corresponding GAAP financial measure in this release and in the Company’s financial statements and by providing a reconciliation to the corresponding GAAP measure to enable investors to perform their own analysis.
     Non-GAAP operating expense. Non-GAAP operating expense excludes the effects of (i) amortization of intangibles, (ii) stock-based compensation expense, (iii) net insurance settlement (recovery) associated with the settlement of certain shareholder lawsuits, and (iv) impairment of goodwill. The Company believes that presentation of a measure of operating expenses that excludes the amortization of intangibles and stock-based compensation expense is useful to investors and the Company for the same reasons as described above with respect to non-GAAP gross margins. With respect to the exclusion of net insurance settlement (recovery) and impairment of goodwill, the Company believes that presentation of a measure of operating expenses that excludes such charges is useful to management and investors in evaluating the performance of the Company’s ongoing core business operations on a period-to-period basis. In this regard, the Company notes that both the net insurance settlement (recovery) and impairment charges are non-recurring in nature. The net insurance settlement (recovery) relates to the settlement of shareholder litigation and does not arise out of or reflect charges associated with the Company’s core business operations. Similarly, the impairment charges are not expected to be recurring and are the result of an assessment of goodwill associated with
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August 10, 2006
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prior acquisitions and do not relate to the performance of the Company’s ongoing core business operations.
     The Company believes disclosure of non-GAAP operating expense has economic substance because the excluded expenses are either non-recurring in nature or do not represent current cash expenditures. A material limitation associated with the use of this measure as compared to the GAAP measure of operating expenses is that it may not be comparable with the calculation of operating expenses for other companies in the Company’s industry. The Company compensates for these limitations by providing full disclosure of the effects of this non-GAAP measure, by presenting the corresponding GAAP financial measure in this release and in the Company’s financial statements and by providing a reconciliation to the corresponding GAAP measure to enable investors to perform their own analysis.
     Non-GAAP operating income. Non-GAAP operating income excludes the effects of (i) amortization of intangibles, (ii) stock-based compensation expense, (iii) net insurance settlement (recovery) associated with the settlement of certain shareholder lawsuits, and (iv) impairment of goodwill. The Company believes that presentation of a measure of operating income that excludes these items is useful to management and investors for the same reasons as described above with respect to gross margins and operating expenses.
     The Company believes disclosure of non-GAAP operating income has economic substance because the excluded expenses are either non-recurring in nature or do not represent current cash expenditures. A material limitation associated with the use of this measure as compared to the GAAP measure of operating income is that it may not be comparable with the calculation of operating income for other companies in the Company’s industry. The Company compensates for these limitations by providing full disclosure of the effects of this non-GAAP measure, by presenting the corresponding GAAP financial measure in this release and in the Company’s financial statements and by providing a reconciliation to the corresponding GAAP measure to enable investors to perform their own analysis.
     Non-GAAP net income and non-GAAP net income per share. Non-GAAP net income and non-GAAP net income per share exclude the effects of (i) amortization of intangibles, (ii) stock-based compensation expense, (iii) net insurance settlement (recovery) associated with the settlement of certain shareholder lawsuits, (iv) impairment of goodwill, (v) impairment of strategic investment and associated note, and (vi) gains (losses) associated with the repurchase of convertible subordinated notes. In addition, non-GAAP net income and non-GAAP net income per share reflect an adjustment of income tax expense associated with exclusion of the foregoing expense (income) items. The adjustment of income taxes is required in order to provide management and investors a more accurate assessment of the taxes that would have been payable on net income, as adjusted by exclusion of the effects of the above-listed items. The Company believes that presentation of measures of net income and net income per share that exclude these items is useful to management and investors for the reasons described above with respect to non-GAAP gross margins and non-GAAP operating expenses. With respect to the exclusion of gains (losses) associated with the repurchase of convertible subordinated notes, although the Company has recorded gain/loss from the repurchase of convertible subordinated notes in various periods over the past three years, the Company believes that it is unlikely that any material gain/loss will arise from repurchases of currently outstanding convertible notes in the future due to the fact that the noteholders will have the right to (and likely will) require the Company to redeem the notes at their face value in December 2006. Moreover, the Company believes that the exclusion of gain/loss from the
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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repurchase of convertible subordinated notes is useful to the Company and investors because, among other things, the gains/losses associated with such repurchases are not indicative of past or future cost of borrowing or returns on invested cash nor do they reflect the Company’s core business operations. In this regard, the Company notes that it does not actively trade in its own debt securities and does not plan on any gains associated with repurchases of its securities for funding of its operations and the amount of any such gain/loss is not predictable nor within the Company’s control. With respect to the exclusion of charges relating to the impairment of strategic investment and associated notes, the Company believes that presentation of a measure of net income and net income per share that excludes such charges 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, the Company notes that the impairment charges are non-recurring in nature and are unrelated to the Company’s core business operations.
     The Company believes disclosure of non-GAAP net income and non-GAAP net income per share has economic substance because the excluded expenses are either non-recurring in nature, do not represent current cash expenditures, or, with respect to gains (losses) associated with the repurchase of convertible subordinated notes, are unlikely to be recurring and are variable in nature. A material limitation associated with the use of this measure as compared to the GAAP measures of net income and net income per share is that they may not be comparable with the calculation of net income and net income per share for other companies in the Company’s industry. The Company compensates for these limitations by providing full disclosure of the effects of this non-GAAP measure, by presenting the corresponding GAAP financial measure in this release and in the Company’s financial statements and by providing a reconciliation to the corresponding GAAP measure to enable investors to perform their own analysis.
“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, 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. The company wishes to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include the ability to realize the anticipated benefits of the Aarohi acquisition on a timely basis or at all, and the company’s ability to integrate the technology, operations and personnel of Aarohi into its existing operations in a timely and efficient manner. 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. In the past, the Company’s results have been significantly impacted by a widespread slowdown in technology investment that pressured the storage networking market that is the mainstay of the Company’s business. A downturn in information technology spending could adversely affect the Company’s revenues and results of operations. As a result of this uncertainty, the Company is 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 the Company’s OEM customers to successfully incorporate the Company’s products into their systems; the Company’s 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 the Company’s or the Company’s OEM customers’ new or enhanced products; the variability in the level of the Company’s backlog and the variable booking patterns of the Company’s customers; the effects of terrorist activities, natural disasters and resulting political or economic instability; the highly competitive nature of the markets for the Company’s products as well as pricing pressures that may result from such competitive conditions; the Company’s ability and the ability of the Company’s OEM customers to keep pace with the rapid technological changes in the Company’s industry and gain market acceptance for new products and technologies; 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 products; a decrease in the average unit selling prices or an increase in the manufactured cost of the Company’s products; delays in product development; the Company’s reliance on third-party suppliers and subcontractors for components and assembly; any inadequacy of the Company’s intellectual property protection or the potential for third-party claims of infringement; the Company’s ability to attract and retain key technical personnel; plans for research and development in India; the Company’s dependence on foreign sales and foreign produced products; the effect of acquisitions; impairment charges; changes in tax rates or legislation; and changes in accounting standards. These and other factors which could cause actual
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August 10, 2006
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results to differ materially from those in the forward-looking statements are discussed in the company’s filings with the Securities and Exchange Commission, including its recent filings on Forms 8-K, 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 FY ‘06 Fourth Quarter Results
August 10, 2006
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EMULEX CORPORATION AND SUBSIDIARIES
Preliminary Condensed Consolidated Statements of Income
(in thousands, except per share data)
                                 
    Three Months Ended   Year Ended
    July 2,   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
Net revenues
   $ 98,871     $ 108,177     $ 402,813     $ 375,653  
Cost of sales
     40,738       43,148       163,822       154,530  
     
Gross profit
     58,133       65,029       238,991       221,123  
     
 
                                
Operating expenses:
                                
Engineering and development
     23,753       18,986       89,669       79,971  
Selling and marketing
     9,807       9,426       36,169       32,441  
General and administrative
     6,364       4,255       23,680       11,636  
Impairment of goodwill
     —       (697 )     —       1,096  
Amortization of intangibles
     2,688       2,816       10,831       11,314  
     
Total operating expenses
     42,612       34,786       160,349       136,458  
     
 
                                
Operating income
     15,521       30,243       78,642       84,665  
     
 
                                
Nonoperating income:
                                
Interest income
     6,731       3,864       21,150       13,106  
Interest expense
     (628 )     (783 )     (2,494 )     (4,202 )
Gain (loss) on repurchase of convertible subordinated notes
     —       7,703       —       20,514  
Other income (expense), net
     140       (2,321 )     172       (2,273 )
     
Total nonoperating income
     6,243       8,463       18,828       27,145  
     
 
                                
Income before income taxes
     21,764       38,706       97,470       111,810  
 
                                
Income tax provision
     9,102       13,405       39,570       40,221  
     
 
                                
Net income
   $ 12,662     $ 25,301     $ 57,900     $ 71,589  
     
 
                                
Net income per share:
                                
Basic
   $ 0.15     $ 0.30     $ 0.69     $ 0.86  
     
Diluted
   $ 0.14     $ 0.28     $ 0.65     $ 0.80  
     
 
                                
Number of shares used in per share computations:
                                
Basic
     84,387       83,123       83,920       82,819  
     
Diluted
     91,466       91,625       91,259       92,970  
     
The interest expense adjustment, net of tax, to the Company’s GAAP diluted per share calculation due to the dilutive effect of its convertible subordinated notes was $362 and $511 for the three months ended July 2, 2006, and July 3, 2005 respectively. The interest expense adjustment, net of tax, to the Company’s GAAP diluted per share calculation due to the dilutive effect of its convertible subordinated notes was $1,477 and $2,685 for the year ended July 2, 2006, and July 3, 2005, respectively.
Please note that the amortization of technology intangibles resulting from previous acquisitions has been reclassified from operating expenses to cost of sales for the three months and year ended July 3, 2005 to conform to the current period presentation.
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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EMULEX CORPORATION AND SUBSIDIARIES
Preliminary Condensed Consolidated Balance Sheets
(in thousands)
                 
    July 2,   July 3,
    2006   2005
     
Assets
                
 
                
Current assets:
                
Cash and cash equivalents
   $ 224,292     $ 120,317  
Investments
     367,054       346,675  
Accounts and other receivables, net
     61,361       47,730  
Inventories, net
     22,414       36,266  
Prepaid expenses
     4,618       4,508  
Deferred income taxes
     26,369       28,961  
     
Total current assets
     706,108       584,457  
 
                
Property and equipment, net
     67,114       65,976  
Investments
     7,103       54,936  
Intangibles, net
     69,785       95,806  
Other assets
     36,220       606  
     
 
   $ 886,330     $ 801,781  
     
 
                
Liabilities and Stockholders’ Equity
                
 
                
Current liabilities:
                
Accounts payable
   $ 17,847     $ 29,778  
Accrued liabilities
     20,883       21,505  
Income taxes payable
     27,824       25,361  
Convertible subordinated notes
     235,177       —  
     
Total current liabilities
     301,731       76,644  
 
                
Convertible subordinated notes
     —       233,382  
Deferred income taxes and other
     10,237       14,164  
     
Total liabilities
     311,968       324,190  
     
 
                
Total stockholders’ equity
     574,362       477,591  
     
 
   $ 886,330     $ 801,781  
     
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
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EMULEX CORPORATION AND SUBSIDIARIES
Supplemental Information
Historical Revenue by Channel and Territory:
                                         
    Q4 FY 2006           Q4 FY 2005           % Change
($000s)   Revenue   % Total Revenue   Revenue   % Total Revenue   Year/Year
                 
Revenue from OEM customers
   $ 65,352       66 %   $ 70,650       65 %     - 7 %
Revenue from distribution
     33,462       34 %     37,440       35 %     - 11 %
Other
     57     nm     87     nm   nm
                 
 
                                        
Total net revenues
   $ 98,871       100 %   $ 108,177       100 %     -9 %
                 
United States
   $ 55,703       56 %   $ 59,415       55 %     - 6 %
Pacific Rim countries
     11,131       11 %     17,089       16 %     - 35 %
Europe and rest of world
     32,037       33 %     31,673       29 %     1 %
                 
 
                                        
Total net revenues
   $ 98,871       100 %   $ 108,177       100 %     - 9 %
                 
Summary of Stock Based compensation:
                                 
    Three Months Ended   Year Ended
    July 2,   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
Cost of sales
   $ 340     $ 29     $ 788     $ 140  
Engineering & development
     2,509       206       8,566       1,402  
Selling & marketing
     1,253       191       4,591       859  
General & administrative
     1,784       254       7,374       1,583  
     
Total stock based compensation
   $ 5,886     $ 680     $ 21,319     $ 3,984  
     
Reconciliation of preliminary GAAP gross margin to non-GAAP gross margin:
                                 
    Three Months Ended   Year Ended
    July 2,   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
GAAP gross margin, as presented above
     58.8 %     60.1 %     59.3 %     58.9 %
     
 
                                
Items excluded from GAAP gross margin to calculate non-GAAP gross margin:
                                
Stock-based compensation(1)
     0.0 %     0.0 %     0.0 %     0.0 %
Amortization of intangibles
     4.0 %     3.5 %     3.8 %     4.0 %
     
Non-GAAP gross margin
     62.8 %     63.6 %     63.1 %     62.9 %
     
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
Page 12 of 14
Reconciliation of preliminary GAAP operating expenses to non-GAAP operating expenses:
                                 
    Three Months Ended   Twelve Months Ended
    July, 2   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
GAAP operating expenses, as presented above
   $ 42,612     $ 34,786     $ 160,349     $ 136,458  
     
 
                                
Items excluded from GAAP operating expenses to calculate non-GAAP operating expenses:
                                
Stock-based compensation(1)
     (5,546 )     (651 )     (20,531 )     (3,844 )
Amortization of intangibles
     (2,688 )     (2,816 )     (10,831 )     (11,314 )
Impairment of goodwill(2)
    —       697       —       (1,096 )
Net insurance recovery associated with settlement of securities class action and derivative lawsuits
     —       —       415       4,649  
     
Impact on operating expenses
     (8,234 )     (2,770 )     (30,947 )     (11,605 )
     
Non-GAAP operating expenses
   $ 34,378     $ 32,016     $ 129,402     $ 124,853  
     
Reconciliation of preliminary GAAP operating income to non-GAAP operating income:
                                 
    Three Months Ended   Year Ended
    July 2,   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
GAAP operating income, as presented above
   $ 15,521     $ 30,243     $ 78,642     $ 84,665  
     
 
                                
Items excluded from GAAP operating income to calculate non-GAAP operating income:
                                
Stock-based compensation(1)
     5,886       680       21,319       3,984  
Amortization of intangibles
     6,324       6,520       25,407       26,162  
Impairment of goodwill(2)
    —       (697 )     —       1,096  
Net insurance recovery associated with settlement of securities class action and derivative lawsuits
     —       —       (415 )     (4,649 )
Impact on operating income
     12,210       6,503       46,311       26,593  
     
Non-GAAP operating income
   $ 27,731     $ 36,746     $ 124,953     $ 111,258  
     
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
Page 13 of 14
Reconciliation of preliminary GAAP net income to non-GAAP net income:
                                 
    Three Months Ended   Year Ended
    July 2,   July 3,   July 2,   July 3,
    2006   2005   2006   2005
     
GAAP net income, as presented above
   $ 12,662     $ 25,301     $ 57,900     $ 71,589  
     
 
                                
Items excluded from GAAP net income to calculate non-GAAP net income:
                                
Stock-based compensation(1)
     5,886       680       21,319       3,984  
Amortization of intangibles
     6,324       6,520       25,407       26,162  
Impairment of goodwill(2)
    —       (697 )     —       1,096  
Impairment of strategic investment and associated note
     —       2,265       —       2,265  
Net insurance recovery and related interest associated with settlement of securities class action and derivative lawsuits
     —       —       (415 )     (4,964 )
Gain (loss) on repurchase of convertible subordinated notes(3)
     —       (7,703 )     —       (20,514 )
Income tax effect of above items
     (3,343 )     199       (13,378 )     (1,937 )
     
Impact on net income
     8,867       1,264       32,933       6,092  
     
Non-GAAP net income
   $ 21,529     $ 26,565     $ 90,833     $ 77,681  
     
Reconciliation of preliminary diluted GAAP earnings per share to diluted non-GAAP earnings per share:
                                 
    Three Months Ended     Year Ended  
    July 2,     July 3,     July 2,     July 3,  
    2006     2005     2006     2005  
     
Diluted GAAP earnings per share, as presented above
   $ 0.14     $ 0.28     $ 0.65     $ 0.80  
     
 
                                
Items excluded from diluted GAAP earnings per share to calculate diluted non-GAAP earnings per share, net of tax effect:
                                
Stock-based compensation(1)
     0.05       0.01       0.19       0.03  
Amortization of intangibles
     0.05       0.05       0.17       0.18  
Impairment of goodwill(2)
    —       (0.01 )     —       0.01  
Impairment of strategic investment and associated note
     —       0.02       —       0.02  
Net insurance recovery and related interest associated with settlement of securities class action and derivative lawsuits
     —       —       (0.00 )     (0.04 )
Gain (loss) on repurchase of convertible subordinated notes(3)
     —       (0.05 )     —       (0.14 )
     
Impact on diluted earnings per share
     0.10       0.02       0.36       0.06  
     
Non-GAAP diluted earnings per share
   $ 0.24     $ 0.30     $ 1.01     $ 0.86  
     
 
                                
Diluted shares used in GAAP and non-GAAP per share computations
     91,466       91,625       91,259       92,970  
     
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Emulex Corporation FY ‘06 Fourth Quarter Results
August 10, 2006
Page 14 of 14
Forward-Looking Diluted Earnings per Share Reconciliation:
         
    Guidance for  
    Three Months Ending  
    October 1, 2006  
Non-GAAP diluted earnings per share guidance
   $ 0.22-0.24  
 
        
Items excluded, net of tax, from non-GAAP diluted earning per share to calculate GAAP diluted earnings per share guidance:
        
Amortization of intangibles
     (0.05 )
Stock-based compensation
     (0.06 )
 
      
 
        
GAAP diluted earnings per share guidance(4)
   $ 0.11-0.13  
 
      
 
(1)   Amortization of stock-based compensation. For the three months and year ended July 2, 2006, stock-based compensation is calculated in accordance with FAS 123R adopted effective July 4, 2005. For the three months year ended July 3, 2005, stock-based compensation is associated with the acquisitions of Vixel and Giganet.
 
(2)   Impairment of goodwill. During the first and fourth quarters of fiscal 2005, the Company changed estimates and discovered errors related to the deferred tax assets and liabilities of Vixel Corporation (acquired in November 2004) and Giganet, Inc. (acquired in March 2001). As a result, the Company recorded a $1.8 million impairment of goodwill in the first quarter of fiscal 2005 and a $0.7 million reduction of goodwill impairment in the fourth quarter of fiscal 2005. The Company does not believe that this $1.1 million impairment of goodwill is material to fiscal 2005 operations.
 
(3)   Gain (loss) on repurchase of convertible subordinated notes. In the three months ended July 3, 2005, Emulex repurchased $128.5 million in face value of its convertible subordinated notes, resulting in a pre-tax gain of $7.7 million. In the year ended July 3, 2005, Emulex repurchased $298.5 million in face value of its convertible subordinated notes, resulting in a pre-tax gain of $20.5 million.
 
(4)   Excludes some effects arising from the announced acquisition of Aarohi Communications. Emulex will incur charges associated with this acquisition, including additional stock-based compensation, amortization of intangibles and in-process research and development. Because the valuation of deferred tax assets and intangibles associated with the acquisition of Aarohi, which are expected to include core and development technology, in-process research and development, customer relationships and covenants not-to-complete, is not yet complete and the related purchase price allocation has not been finalized, Emulex is unable to provide earnings per share guidance under GAAP at this time.