Will Xyratex Earnings Ride Big Data Higher?

Xyratex (NASDAQ: XRTX) will release its quarterly report on Thursday, and investors have generally liked the stock, which has climbed by about a third during 2013. But Xyratex earnings haven't produced the growth you'd expect from a data-storage specialist, and as major customers Seagate (STX +0.00%) and Western Digital (WDC +1.97%) evolve beyond their past reliance on hard-disk drives, Xyratex will face some challenges in adapting to sustain its revenue.

Xyratex provides products designed to help businesses manage huge amounts of data. Seeking to combine reliabilities, speed, and cost-effectiveness, the company offers disk-drive processing equipment, enterprise data-storage solutions, and integrated file-system storage products. Xyratex has strategic relationships with Seagate, Western Digital, and a number of original-equipment manufacturers, but overreliance on key customers poses a strategic threat of its own. Let's take an early look at what's been happening with Xyratex over the past quarter and what we're likely to see in its report.

Stats on Xyratex

Source: Yahoo! Finance.

Can Xyratex earnings keep giving investors nice surprises?
Analysts haven't budged on their views on Xyratex earnings recently, keeping both their estimates for the quarter that ended in August and their long-range projections unchanged. The stock, though, has performed nicely, with an 11% rise since the end of June.

Just about all of those gains came after Xyratex's earnings report for the quarter that ended in May. Even though revenue fell by about a third and net profits dropped by nearly 60%, investors had actually expected a loss for the quarter. New CEO Ernie Sampias noted that the gradual loss of business from former top customer NetApp, due to its agreement to enable a contract manufacturer to supply licensed products, should stop affecting results after 2014. Moreover, Xyratex has been successful in finding opportunities for its ClusterStor products, which are aimed at the big data area.

Xyratex's problem is its heavy reliance on just a few companies for its sales. Last year, the company got 88% of its revenue from its top six customers, which include Seagate and Western Digital. As those two companies have responded to moves from rival SanDisk to emphasize solid-state memory-based drives over traditional hard drives, Xyratex risks the loss of a key part of its long-term business. Furthermore, struggling hardware makers Dell and Hewlett-Packard are also on Xyratex's top customer list, leaving the prospect of more potential customer defections as those two tech giants seek to adapt their own businesses to the changing tech environment.

Still, Xyratex has a lot going for it. In late August, the company announced it had topped the list of OEM disk-storage-system suppliers for the fifth straight year, commanding fully half the market. That gives Xyratex a big lead over its competitors and shows the potential for the company to keep offering innovative new products to customers and end users.

Notably, one investor continues to have a massive commitment to Xyratex. Hedge fund Baker Street Capital held a 22.5% position in Xyratex as of June 30, and it agreed in April to put two more Baker Street-nominated directors on the company's board, including managing member Vadim Perelman. The move could help shareholders realize even more value going forward.

In the Xyratex earnings report, watch for the company to discuss its strategic vision for the business, especially with respect to its ClusterStor line. With investors expecting contract wins for its products, another positive surprise from Xyratex on the earnings front could push the stock higher still.

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