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TMCNet:  Emulex Announces Second Quarter Results

[January 30, 2014]

Emulex Announces Second Quarter Results

COSTA MESA, Calif. --(Business Wire)--

Emulex Corporation (NYSE:ELX), a leader in network connectivity, monitoring and management, today announced earnings results for the second quarter of fiscal 2014, which ended on December 29, 2013.

Second Quarter Financial Highlights

  • Total net revenues of $123.0 million
  • Network Connectivity Products (NCP) net revenues of $87.2 million, representing 71% of total net revenues
  • Network Visibility Products (NVP), net revenues of $9.6 million, representing 8% of total net revenues
  • Storage Connectivity and Other Products (SCOP) net revenues of $26.1 million, representing 21% of total net revenues
  • Non-GAAP gross margins of 66% and GAAP gross margins of 59%
  • Non-GAAP diluted earnings per share of $0.21
  • GAAP loss per share of $0.05, which includes an approximately $0.09 impact related to our previously announced restructuring
  • Cash, cash equivalents and investments at the end of the quarter of $198.7 million
  • Raised $175 million through a convertible debt offering
  • Announced a $200 million share repurchase program of which $100 million was transacted in Q2, consisting of $56 million of direct treasury stock purchases and $44 million paid for treasury stock repurchases under an accelerated stock buyback program which will conclude by May 2014
  • Weighted share count of 88.6 million shares in the December quarter compared to 93.5 million in the first quarter

Second Quarter Business Highlights

  • Implemented a three-part initiative to improve profitability and enhance shareholder value
    • Expanded cost savings program to deliver $30 million in annual cost savings compared to the fiscal 2013 spending level in the connectivity business. The program includes a 15% workforce reduction and the closure of the Bolton, Massachusetts engineering facility by the end of fiscal 2014
    • Announced a $200 million share repurchase program, of which $100 million is expected to be completed by the end of May 2014 primarily funded by completion of $175 million convertible debt offering due in 2018
    • Received acceptances from Gary J. Daichendt, a former networking executive and current board member of ShoreTel and NCR, John A. Kelley, Jr., a former storage and telecom equipment chief executive officer (CEO) and current board member of Polycom, and Rahul N. Merchant, former chief information and innovation officer for the City of New York and current board member of Fair Isaac Corporation (FICO), to be seated as independent board members at our upcoming shareholders meeting on February 6, 2014
  • Unveiled the next generation OneConnect® 10Gb and 40Gb Ethernet (10/40GbE) network adapter family, which represents the Company's first 40GbE Network Adapters and RDMA over Converged Ethernet (RoCE) capable Converged Network Adapters (CNAs), delivering increased server virtualization density, software-defined networking enablement and advanced functionality for hybrid cloud environments
  • Delivered revenue shipments of the redesigned OCe11000R adapters based on the new XE4310R Ethernet controller
  • Announced joint development with Brocade to deliver a new generation of advanced Gen 6 (32Gb) Fibre Channel (FC) solutions, enabling increased network performance, higher scalability and improved reliability for the highly virtualized data center
  • Announced a key customer reference with IRESS, a financial services organization, who is deploying the EndaceProbe™ Intelligent Network Recorder (INR) and the EndaceVision™ software suite to consolidate its network operations infrastructure, improve network performance and increase security monitoring capabilities in its data centers
  • Expanded Gen 5 Fibre Channel ecosystem partner certification for its LightPulse® Gen 5 (16Gb) FC Host Bus Adapters (HBAs), including ATTO Technology, Bloombase, Imation, Permabit and Violin Memory

"With solid top line performance, I'm pleased to report that we once again exceeded the high-end of our earnings guidance, and have made significant progress on our three-part initiative to increase shareholder value," commented Jeff Benck, president and CEO, Emulex. "I'm particularly proud that our team began shipping revenue units based upon our redesigned controller last quarter, and just last week, we introduced our next generation Ethernet adapter family, including the company's first 40Gb Ethernet and RDMA-capable adapters."

"We've also added a wealth of experience to the Company with the addition of Kyle Wescoat as CFO and the new independent director candidates, which will help the Company as we continue our initiatives in support of enhanced profitability and shareholder value," Benck 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 and storage launches by our customers, and the results and related costs of ongoing patent litigation, Emulex is providing guidance for its third fiscal quarter ending March 30, 2014. For the third quarter of fiscal 2014, Emulex is forecasting total net revenues in the range of $110 - $114 million. The Company expects non-GAAP earnings per diluted share of $0.14 - $0.17 in the third quarter. 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, the royalties, mitigation expenses and license fees associated with the Broadcom patent litigation, accretion of debt discount on convertible senior notes, and site closure and related restructuring costs, as well as the associated tax effects and the impact of our U.S. GAAP tax valuation allowance. A reconciliation between GAAP and non-GAAP results are included in the accompanying financial data.



EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
Three Months Ended Six Months Ended
December 29, December 30, December 29, December 30,
2013 2012 2013 2012
Net revenues $122,996 $122,145 $237,828 $241,412
Cost of sales:
Cost of goods sold 42,109 44,472 81,800 88,623

Amortization of core and developed technology intangible assets

6,239 5,149 12,399 10,297

Patent litigation damages, license fees and royalties

2,358 958 3,855 1,950
Cost of sales 50,706 50,579 98,054 100,870
Gross profit 72,290 71,566 139,774 140,542
Operating expenses:
Engineering and development 42,020 40,113 82,431 78,583
Selling and marketing 19,849 14,769 38,941 28,506
General and administrative 10,407 10,987 20,036 19,495

Amortization of other intangible assets

1,603 1,365 3,207 2,888
Total operating expenses 73,879 67,234 144,615 129,472
Operating (loss) income (1,589 ) 4,332 (4,841 ) 11,070
Non-operating loss:
Interest income 16 8 20 8
Interest expense (1,148 ) 2 (1,150 ) (4 )
Other income (expense), net (135 ) (27 ) 17 (363 )
Total non-operating loss (1,267 ) (17 ) (1,113 ) (359 )
(Loss) income before income taxes (2,856 ) 4,315 (5,954 ) 10,711
Income tax provision (benefit) 1,171 (1,268 ) 1,714 4,471
Net (loss) income $(4,027 ) $5,583 $(7,668 ) $6,240
Net (loss) earnings per share:
Basic $(0.05 ) $0.06 $(0.09 ) $0.07
Diluted $(0.05 ) $0.06 $(0.09 ) $0.07
Number of shares used in per share computations:
Basic 86,881 90,063 89,162 89,705
Diluted 86,881 91,816 89,162 91,637
EMULEX CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited, in thousands) � � � December 29, June 30, 2013 � � 2013

Assets

� Current assets: Cash and cash equivalents $ 198,679 $ 105,637 Accounts receivable, net 87,177 82,363 Inventories 24,051 23,897 Prepaid income taxes 2,473 10,166 Prepaid expenses and other current assets 17,110 14,113 Deferred income taxes � 3,137 � � � 3,137 Total current assets 332,627 239,313 � Property and equipment, net 62,477 62,415 Goodwill and Intangible assets, net 372,211 387,817 Other assets � 23,090 � � � 21,164 $ 790,405 � � $ 710,709

Liabilities and Stockholders' Equity

� Current liabilities: Accounts payable $ 30,354 $ 27,725 Accrued and other current liabilities � 46,201 � � � 43,861 Total current liabilities 76,555 71,586 � � Convertible notes 143,667 - Other liabilities 5,602 4,924 Deferred income taxes 17,048 17,048 Accrued taxes � 29,526 � � � 29,526 Total liabilities � 272,398 � � � 123,084 � � Total stockholders' equity � 518,007 � � � 587,625 $ 790,405 � � $ 710,709 � �
EMULEX CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (unaudited, in thousands) �

Six Months Ended December 29, � December 30, 2013 � 2012 � Cash flows from operations: Net (loss) income $ (7,668 ) $ 6,240

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

Depreciation and amortization 25,209 21,956 Stock based compensation 8,316 10,929 Deferred income taxes - (452 ) Other reconciling items 829 (202 ) Changes in assets and liabilities � 6,848 � � � (49,954 )

Net cash provided by (used in) operating activities

� 33,534 � � � (11,483 ) � Cash flows from investing activities: Investment in property and equipment, net (10,006 ) (6,960 ) Maturities of/(proceeds from) investments, net � - � � � 26,701 �

Net cash provided by (used in) investing activities

� (10,006 ) � � 19,741 � � Cash flows from financing activities: Issuance of convertible senior notes 175,000 - Repurchase of common stock (100,000 ) - Other � (5,649 ) � � (515 ) Net cash provided by (used in) financing activities � 69,351 � � � (515 ) � Effect of exchange rates on cash and cash equivalents �

163

� � �

161

� � Net increase in cash & cash equivalents 93,042 7,904 Opening cash balance � 105,637 � � � 201,048 � Ending cash balance $ 198,679 � � $ 208,952 � � �

EMULEX CORPORATION AND SUBSIDIARIES
Supplemental Information

Historical Net Revenue by Product Lines:

Network Connectivity Products (NCP) primarily consist of Fibre Channel LightPulse® and Ethernet OneConnect® standup HBAs, mezzanine cards, I/O ASICs, ULOMs, and UCNAs to provide server Input/Output (I/O) and target storage array connectivity to enable servers to reliably and efficiently connect to Local Area Networks, Storage Area Networks and Network Attached Storage by offloading data communication processing tasks from the servers as information is delivered and sent to the network.

Network Visibility Products (NVP) consists entirely of the recently acquired Endace® family of network visibility and intelligent network recording products, which consists of EndaceProbe™ Intelligent Network Recorder appliances, the EndaceVision™ browser-based network traffic search engine, EndaceAccess™ network visibility headend systems and Data Acquisition and Generation (DAG) network capture cards, providing organizations with complete network performance management at speeds up to 100Gb Ethernet.

Storage Connectivity and Other Products (SCOP) includes Emulex InSpeed®, switch-on-a-chip (SOC) and backend connectivity, bridge, and router products, Pilot™ Integrated Baseboard Management Controllers (iBMCs), certain legacy products and other products and services. Many of these products are deployed inside storage arrays, tape libraries, and other storage appliances, connecting storage controllers to storage capacity, delivering improved performance, reliability, and connectivity.

($000s) � Q2 FY
2014

Revenues

� Q1 FY
2014

Revenues

� Q4 FY
2013
Revenues � Q3 FY
2013

Revenues

� Q2 FY
2013
Revenues � % Change
Q2 vs Q2 � � � � � Network Connectivity Products $ 87,205 $ 77,980 $ 82,943 $ 85,166 $ 96,132 (9 )%

Storage Connectivity and Other Products

� 26,143 � � � 26,755 � � � 29,115 � � �

26,747

� � � 26,013 � �

nm

� Emulex Connectivity Division $ 113,348 � � $ 104,735 � � $ 112,058 � � $ 111,913 � � $ 122,145 � � (7 )% Network Visibility Products � 9,648 � � � 10,097 � � � 8,311 � � � 4,873 � � � - � � na � Total net revenues $ 122,996 � � $ 114,832 � � $ 120,369 � � $ 116,786 � � $ 122,145 � � 1 % na - not applicable

nm - not meaningful

� % Total

Revenues

� % Total
Revenues � % Total

Revenues

� % Total
Revenues � % Total
Revenues � � � � Network Connectivity Products 71 % 68 % 69 % 73 % 79 % Storage Connectivity and Other Products � 21 % � � 23 % � � 24 % � � 23 % � � 21 % � � � Emulex Connectivity Division � 92 % � � 91 % � � 93 % � � 96 % � � 100 % � � � Network Visibility Products � 8 % � � 9 % � � 7 % � � 4 % � � - � � � � Total net revenues � 100 % � � 100 % � � 100 % � � 100 % � � 100 % � � � � �

Historical Net Revenues by Channel and Territory:

� � � � � � � ($000s) Q2 FY
2014

Revenues

% Total
Revenues

� Q2 FY
2013

Revenues

% Total
Revenues

� % Change � � Revenues from OEM customers $ 102,235 83 % $ 110,174 90 % (7 )% Revenues from distribution 16,424 13 % 11,896 10 % 38 % Other � 4,337 � 4 % � 75 � nm � nm � Total net revenues $ 122,996 � 100 % $ 122,145 � 100 % 1 % � Asia-Pacific $ 71,169 58 % $ 73,610 60 % (3 )% United States 34,012 28 % 31,151 26 % 9 % Europe, Middle East and Africa 17,176 14 % 15,941 13 % 8 % Rest of world � 639 � nm � � 1,443 � 1 % nm � Total net revenues $ 122,996 � 100 % $ 122,145 � 100 % 1 %

nm - not meaningful

� �

Summary of Stock-Based Compensation:

� �

Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, ($000s) � 2013 � � 2012 � � 2013 � � 2012 � Cost of sales $ 147 $ 181 $ 236 $ 496 Engineering and development 1,132 2,214 3,036 4,912 Selling and marketing 874 941 2,076 1,686 General and administrative � 1,591 � � 2,039 � � 2,968 � � 3,835 Total stock-based compensation $ 3,744 � $ 5,375 � $ 8,316 � $ 10,929 � �

Summary of Site Closure and Related Restructuring Costs:

� �

Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, ($000s) � 2013 � � 2012 � � 2013 � � 2012 � Cost of sales $ 277 $ - $ 277 $ - Engineering and development 5,259 - 5,259 - Selling and marketing 668 - 668 - General and administrative � 1,246 � � - � � 1,246 � � -

Total site closure and restructuring costs

$ 7,450 � $ - �

$

7,450

$

-

� �

Reconciliation of GAAP Gross Margin to Non-GAAP Gross Margin:

� � Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, 2013 � � 2012 � � 2013 � � 2012 � � GAAP gross margin 58.8 % � 58.6 % � 58.8 % � 58.2 % � Items excluded from GAAP gross margin to calculate non-GAAP gross margin: Stock-based compensation 0.1 % 0.1 % 0.1 % 0.2 % Amortization of intangibles 5.1 % 4.2 % 5.2 % 4.3 %

Site closure and related restructuring costs

0.2 % - 0.1 % -

Patent litigation damages, license fees and royalties

1.9 % � 0.8 % �

1.6

%

0.8

%

Non-GAAP gross margin 66.1 % � 63.7 % � 65.8 % � 63.5 % � �

Reconciliation of GAAP Operating Expenses to Non-GAAP Operating Expenses:

� �

Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, ($000s) � 2013 � � � 2012 � � � 2013 � � � 2012 � �

GAAP operating expenses, as presented above

$ 73,879 � � $ 67,234 � � $ 144,615 � � $ 129,472 � �

Items excluded from GAAP operating expenses to calculate non-GAAP operating expenses:

Stock-based compensation

(3,597 ) (5,194 ) (8,080 ) (10,433 ) Amortization of other intangibles (1,603 ) (1,365 ) (3,207 ) (2,888 ) Severance and associated costs 80 - 80 -

Site closure and related restructuring costs

(7,173 ) -

(7,173

)

-

Mitigation expenses related to the Broadcom patents

(930 ) (982 ) (3,449 ) (1,464 )

Expenses related to the acquisition of Endace

� - � � � (2,060 ) � � (373 ) � � (2,060 ) Impact on operating expenses � (13,223 ) � � (9,601 ) � � (22,202 ) � � (16,845 ) Non-GAAP operating expenses $ 60,656 � � $ 57,633 � � $ 122,413 � � $ 112,627 � � �

Reconciliation of GAAP Operating (Loss) Income to Non-GAAP Operating Income:

� �

Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, ($000s) � 2013 � � � 2012 � � 2013 � � � 2012 �

GAAP operating (loss) income as presented above

$ (1,589 ) � $ 4,332 � $ (4,841 ) � $ 11,070 � Items excluded from GAAP operating (loss) income to calculate non-GAAP operating income: Stock-based compensation 3,744 5,375 8,316 10,929 Amortization of intangibles 7,842 6,514 15,606 13,185 Severance and associated costs (80 ) - (80 ) -

Site closure and related restructuring costs

7,450 -

7,450

-

Patent litigation damages, license fees and royalties

2,358 958

3,855

1,950

Mitigation expenses related to the Broadcom patents

930 982 3,449 1,464

Expenses related to the acquisition of Endace

� - � � � 2,060 � � 373 � � � 2,060

Impact on operating (loss) income

� 22,244 � � � 15,889 � � 38,969 � � � 29,588 Non-GAAP operating income $ 20,655 � � $ 20,221 � $ 34,128 � � $ 40,658 � �

Reconciliation of GAAP Net (Loss) Income to Non-GAAP Net Income:

� � Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, ($000s) � 2013 � � � 2012 � � � 2013 � � � 2012 � �

GAAP net (loss) income as presented above

$ (4,027 ) � $ 5,583 � � $ (7,668 ) � $ 6,240 � � Items excluded from GAAP net (loss) income to calculate non-GAAP net income: Stock-based compensation 3,744 5,375 8,316 10,929 Amortization of intangibles 7,842 6,514 15,606 13,185 Severance and associated costs (80 ) - (80 ) -

Site closure and related restructuring costs

7,450 -

7,450

-

Patent litigation damages, license fees and royalties

2,358 958

3,855

1,950

Mitigation related to the Broadcom patents

930 982 3,449 1,464

Expenses related to the acquisition of Endace

- 2,060 373 2,060

Accretion of debt discount on convertible senior notes

765 -

765

-

Tax impact of above items and U.S. GAAP tax valuation allowance � (636 ) � � (4,238 ) � �

(1,331

)

� �

(1,082

)

Impact on GAAP net (loss) income � 22,373 � � � 11,651 � � � 38,403 � � � 28,506 � Non-GAAP net income $ 18,346 � � $ 17,234 � � $ 30,735 � � $ 34,746 � � �

Reconciliation of GAAP Diluted (Loss) Earnings Per Share to Non-GAAP Diluted Earnings Per Share:

� � Three Months Ended Six Months Ended December 29, � December 30, December 29, � December 30, (shares in 000s) � 2013 � � � 2012 � � � 2013 � � � 2012 �

GAAP diluted (loss) earnings per share as presented above

$ (0.05 ) � $ 0.06 � � $ (0.09 ) � $ 0.07 � �

Items excluded from GAAP (loss) earnings per share to calculate diluted non-GAAP earnings per share, net of tax effect:

Stock-based compensation 0.04 0.06 0.09 0.12 Amortization of intangibles 0.09 0.07 0.17 0.14 Severance and associated costs (0.00 ) - (0.00

)

-

Site closure and related restructuring costs

0.09 - 0.08 -

Patent litigation damages, license fees and royalties

0.03

0.01

0.05

0.02

Mitigation related to the Broadcom patents

0.01 0.01 0.04 0.02

Expenses related to the acquisition of Endace

- 0.02 0.00 0.02

Accretion of debt discount on convertible senior notes

0.01 -

0.01

-

Tax impact of above items and U.S. GAAP tax valuation allowance

� (0.01 ) � � (0.04 ) � � (0.01 ) � � (0.01 )

Impact on GAAP (loss) earnings per share

� 0.26 � � � 0.13 � � �

0.43

� � �

0.31

� Non-GAAP diluted earnings per share $ 0.21 � � $ 0.19 � � $ 0.34 � � $ 0.38 �

Diluted shares used in non-GAAP per share computations

� 88,578 � � � 91,816 � � � 91,008 � � � 91,637 � � �

Forward-Looking Diluted Earnings per Share Reconciliation:

� Guidance for

Three Months Ending

March 30, 2014

� � Non-GAAP diluted earnings per share guidance $0.14 - $0.17 �

Items excluded, net of tax, from non-GAAP diluted earnings per share to calculate GAAP diluted earnings (loss) per share guidance:

Stock-based compensation (0.06 ) Amortization of intangibles (0.09 )

Patent litigation damages, license fees, royalties and mitigation expenses

(0.04 ) Accretion of debt discount on convertible senior notes (0.02 ) Site Closure and related restructuring costs (0.01 ) Tax impact of above items and U.S. GAAP tax valuation allowance 0.01 � � GAAP earnings (loss) per diluted share guidance ($0.07 - $0.04 ) � �

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.

Site closure and related 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, in addition to approximately $0.5m of expense included in stock-based compensation. 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 damages, license fees 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 but will continue in future periods until affected products are phased out.

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.

Expenses related to the acquisition of Endace Limited (LSE:EDA). We have incurred various expenses during the acquisition process 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 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 these expenditures do not reflect a continuing cost of operating our current core business. In this regard, we note that expenses of this type are infrequent in nature.

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.

- - - - - - - - -

"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 a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These factors include the possibility that all or a substantial portion of the cost savings targeted by us will not be realized at all or on a timely basis even though we expect to incur charges relating to the cost saving initiative and that the share repurchases implemented by us may not be completed in whole or in part or within the expected timeframe. The assumptions on which the cost savings, share repurchase and capital return goals and expectations are based necessarily involve judgments with respect to, among other things, economic, competitive and financial market conditions and the impact of the cost savings initiative on our customers, all of which are difficult or impossible to predict and many of which are beyond the Company's control. Furthermore, our proposed changes to the membership of our board of directors may not have the desired effect in helping us achieve and implement our business and strategic goals. These factors also include the possibility that we may not realize the anticipated benefits from the acquisition of Endace Limited on a timely basis or at all, and may be unable to integrate the technology, operations and personnel of Endace into our existing operations in a timely and efficient manner.�In addition, 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, loss of patent rights, monetary damages, injunctions against the sale of products incorporating the technology in question, counterclaims, attorneys' fees, incremental costs associated with product or component redesigns, liabilities to customers under reimbursement agreements or contractual indemnification provisions, 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 network connectivity and visibility 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. Continued weakness in domestic and worldwide macro-economic conditions, related disruptions in world credit and equity markets, and the resulting economic uncertainty for our customers, as well as the overall network connectivity and visibility networks, has and could continue to adversely affect our revenues and results of 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 network connectivity and visibility 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; the effect of any actual or potential unsolicited offers to acquire us; proxy contests or the activities of activist investors; 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, 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 effect of rapid migration of customers towards newer, lower cost product platforms; 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 as well as government grants related thereto; 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."

About Emulex

Emulex, a leader in network connectivity, monitoring and management, provides hardware and software solutions for global networks that support enterprise, cloud, government and telecommunications. Emulex's products enable unrivaled end-to-end application visibility, optimization and acceleration. The Company's I/O connectivity offerings, including its line of ultra high-performance Ethernet and Fibre Channel-based connectivity products, have been designed into server and storage solutions from leading OEMs, including Cisco, Dell, EMC, Fujitsu, Hitachi, HP, Huawei, IBM, NetApp and Oracle, and can be found in the data centers of nearly all of the Fortune 1000. Emulex's monitoring and management solutions, including its portfolio of network visibility and recording products, provide organizations with complete network performance management at speeds up to 100Gb Ethernet. Emulex is headquartered in Costa Mesa, Calif., and has offices and research facilities in North America, Asia and Europe. For more information about Emulex (NYSE:ELX) please visit http://www.Emulex.com.

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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.


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