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Executives

Brad Driver

Richard Pearce - Chief Financial Officer and Director

Steve Barber - Chief Executive Officer and Director

Analysts

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

David Ryzhik

Jung Pak

Xyratex (XRTX) Q2 2012 Earnings Call July 5, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Xyratex Earnings Conference Call. My name is Kim, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to your host for today's conference, Mr. Brad Driver, Vice President of Investor Relations. Please proceed, Mr. Driver.

Brad Driver

Thank you, Kim, and good afternoon, everyone. Thank you for taking the time to join us this afternoon. I'd like to welcome investors, research analysts and others listening today to Xyratex's Fiscal Second Quarter 2012 Results Conference Call.

On our call today are Steve Barber, Chief Executive Officer; and Richard Pearce, Chief Financial Officer. Today's call is being recorded and will be available for replay on Xyratex's Investor Relations home page at www.xyratex.com.

I'd like to remind everyone that today's comments, including the question-and-answer session, will include forward-looking statements, including but not limited to, a forecast of future revenue and earnings and other financial and business activities. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Xyratex's filings with the Securities and Exchange Commission, including the company's 20-F dated February 24, 2012. Also, please note that in addition to reported financial results in accordance with Generally Accepted Accounting Principles or GAAP, Xyratex routinely reports certain non-GAAP financial results. These non-GAAP measures, together with the corresponding GAAP numbers in reconciliation to GAAP, are contained in our earnings press release. We encourage listeners to review these items.

I'd now like to turn the call over to Richard to review the financial details of the quarter

Richard Pearce

Thank you, Brad, and good afternoon, everyone. I'd like to thank you for joining us today. Our press release is available both on PR Newswire and our website.

I'd now like to provide you with some commentary about our results for the second quarter. Please note that all numbers are in accordance with GAAP, unless stated otherwise. Total revenue was $322.1 million, down 4.9% as compared to the second quarter of last year and up 8.9% from our prior fiscal quarter.

Sales of our Enterprise Data Storage Solutions products was $278.5 million or 86.4% of total revenue. This is a decrease of 7.5% compared to the second quarter of last year and an increase of 2.3% compared to our prior fiscal quarter. Sales of our capital equipment products were $43.7 million or 13.6% of total revenue, up 16.8% compared to the second quarter of last year and up 85% compared to our prior fiscal quarter.

Gross margin was 16.7% for the quarter compared to 12.9% in the same period a year ago and 17.9% in our prior fiscal quarter. The gross margin for our Enterprise Data Storage Solutions products was 16.3% compared to 14.9% last year and 17.3% last quarter.

In addition to product mix, the increase from the prior year was impacted by the sale of specific products without disk drives. The gross margin for our capital equipment products was 19% compared to negative 2.7% last year and 24.7% last quarter. The prior year margin was impacted by a higher fixed cost base, product mix and inventory provisions. This quarter's gross margin was in line with our expectations relative to product mix.

Non-GAAP operating expenses in the quarter were $42.4 million compared to $46.3 million in 2Q of last year and $39.6 million last quarter. The reduction from prior year reflects the restructuring actions we implemented towards the end of last year. The increase in the current period is primarily related to the deferral of some specific product development expense from the first quarter to later in the year and increasing R&D investments in the High Performance Computing area.

On a non-GAAP basis, net income was $9 million or $0.32 per diluted share compared to a net loss of $1.9 million a year ago and net income of $11.4 million in the prior quarter.

Turning our attention now to the balance sheet. Cash and cash equivalents at the end of the quarter was $131.8 million compared with $155.8 million at the end of Q1. This reduction, as forecast, was primarily related to the increase in working capital required for the HDD Capital Equipment business and the increase in disk drive inventories where certain hubbing arrangements have been restricted in the near term. Additionally, the reduction included expenditures for share repurchases of $3.6 million in the quarter.

Cash used in operations was $15.2 million in the quarter. Inventory increased by $27.9 million to $180.3 million in the quarter as described above. Inventory turns were 6 compared to 6.5 for the previous quarter. Accounts receivable decreased by $11.5 million in the quarter to $163.6 million. Days sales outstanding were 46, unchanged from the previous quarter.

Headcount at the end of the May quarter was 2,003 permanent employees, an increase of 53 or 2.7% over the past quarter, primarily in our Asia-based operations and field service organizations in support of the increased HDD Capital Equipment production and installation, as well as our new Software Center of Excellence in Waterloo, Canada.

Now, before I turn it over to Steve for his comments, I'd like to provide you with our business outlook for our fiscal third quarter 2012 ending August 31. Our business outlook is based on current business expectations. It should be noted that there are series of forward-looking statements in today's guidance that involve risk and uncertainty. Actual results may differ materially from our statements or projections. In order to clearly understand the risks involved, we recommend that each investor review the risk factors outlined in our Form 20-F filing.

For our third quarter 2012, we are projecting total revenue to be in the range of $313 million to $373 million, down 14% to up 3% as compared to last year and down 3% to up 16% compared to the prior quarter. For Q3, gross margin is expected to be 17.5% to 18.5%. We are estimating non-GAAP earnings per share to be between $0.39 and $0.77. Non-GAAP earnings per share excludes noncash equity compensation and amortization of intangible assets. The number of shares outstanding at the end of Q3 on a weighted average treasury method is expected to be $28 million.

Our cash position at the end of Q3 is expected to be approximately $130 million. As previously stated, we do expect our fiscal year-end cash position to be approximately $180 million net of share repurchases in the year, which are now estimated to be $20 million and are thereby utilizing the full $50 million repurchase program that was approved in March 2011.

The company announced its third quarter dividend of $0.075 per share payable August 1, in line with the payment in the previous quarter. This dividend represents a yield of approximately 2.7% per annum based on the last 30-day average closing price.

In summary, I believe we did a good job of executing during the quarter while maintaining the focus on expenditure, resulting in net earnings in line with our expectations. I shall now hand the call over to Steve for his comments

Steve Barber

Thank you, Richard. Once again, I was pleased with our performance in the quarter. We executed well to customer demand and made positive progress on our strategic roadmap for the business.

The supply of enterprise class disk drives now effectively unconstrained as we entered the third quarter, we've been able to concentrate on the broader aspects of our business. In the near term, we've seen some softening in storage solutions demand across our customer base, although remains unclear whether this is due to overall market softening in demand, market share shifts or combination of both.

In the Capital Equipment business, we've actively supported the Western Digital through this quarter in their efforts to repair and replace process equipments damaged in the floods, and this work is now almost complete. As we move into the second half of the year, we're seeing strong demand from WD, Toshiba and HGST for process equipment, primarily related to 3.5 inch disk drives and demand from Seagate for component-related equipment.

From an overall financial perspective, as we look forward to the second half of the year relative to analyst expectations, I would expect storage solutions revenue to be around $80 million lower than prior expectations, of which approximately $25 million related to shipping certain products without disk drives. However, approximately half of this reduction will be offset by higher than expected capital equipment revenues and that with slightly better overall margins, earnings should not be materially affected.

The disk drive market space is likely to remain somewhat volatile in the near to medium term, although ultimately, data storage is forecast to continue to grow on a compound annual growth rate of more than 40%, with the vast majority of this being serviced by disk drive base storage within private and public power data centers. Flash memory-based smartphones, tablets and Ultrabooks all rely on accessing and storing data remotely in cloud data centers, which has disk drive base infrastructures. From a capital equipment standpoint, we're adapting our business model and the way we address this market now that there are only 3 customers. However, with our extensive experience in the store base, we believe we remain well-positioned to address the needs of this market sector.

Within our Storage Solutions segment, as we've discussed previously, over the past 4 years, we've made solid progress in broadening our customer base, expanding our product portfolio, introducing complete solutions to our customers and aligning our operational model for the needs of our customers. This has been a focused strategy for Xyratex, recognizing the direction set out by our historically largest customer, NetApp, 4 years ago to leverage their contract manufacturing partnership and to transition towards an internal solution for their future of storage platform requirements. This transition drove an increased need for us to grow our business with our -- with other enterprise storage customers and to broaden our overall customer base. Our success towards this goal has been acknowledged by IDC Research recording Xyratex as the largest OEM storage supplier of enterprise storage systems since 2008.

With our market share increasing over this period, from 25% to almost 50% in 2010 when the last report was published. Equally important for us, has been the progress we've made in expanding our product portfolio beyond JBOD disk drive enclosures, introducing and broadening our application platform offering with integrated server and storage functionality. And more recently, launching our ClusterStor High-Performance Computing storage solution. These high-value add solutions have enabled us to both broaden our accessible market as well as provide our OEM customers with fully integrated product solutions. In addition, we're continuing our investment in being first to market with major technology innovations. Recent examples include our inclusion of full FDR 56 gigabyte per second InfinBand capabilities in our ClusterStor 6000 and the demonstration of our 12 gig SaaS enabled OneStor storage system.

The markets we serve have changed significantly in the past 2 years, driven primarily through industry consolidation in both the storage solutions and disk drive capital equipment market sectors. Many of our emerging customers have been acquired by major global brands with established product portfolios and operating models. In the disk drive sector, the industry has now consolidated to 3 remaining providers and we are working closely with all 3 to understand their capital requirements both in the near and longer term.

In storage solutions, we have focused on developing partnerships with emerging technology companies such as Pure Storage and HPC OEMs such as Cray. As we indicated in our last earnings call, we're pleased with the progress in establishing new customers and program relationships in the Storage Solutions segment. We're now partnered with a number of new emerging enterprise storage companies as well as with 2 major global customers planning new product announcements later this year based on Xyratex technology. We anticipate both of these programs to contribute more than 10% of total revenues in this business in 2013, partially offsetting the previously stated reductions in NetApp volume and revenue.

In addition, we remain very excited by the opportunities we see in the High Performance Computing or HPC data storage market. Our relationship with Cray continues to develop well as they work to expand their presence in the HPC data storage sector. In addition to the very public and significant Blue Waters project where we are partnering with Cray at the NCSA, we are actively supporting Cray with a number of customer valuations within market verticals such as oil and gas, national labs, technical computing and government sectors. Equally, we're very encouraged by additional OEM partnership opportunities emerging. These partners have targeted initiatives for HPC and technical computing applications and are looking to integrate our ClusterStor storage platforms within their total HPC offerings across a diverse and global end-user customer base.

As part of our focus on HPC sector, last month, we announced the addition of the ClusterStor 6000, a Lustre base storage platform which doubles the throughput of our first-generation products launched a year ago. Our ClusterStor solutions provides 2 levels of integration, combining file systems and RAID data protection onto our embedded server modules and consolidating these capabilities into our high-density storage platform as a scalable storage unit. In the ClusterStor 6000 solution, these levels of integration enable linear performance scalability from 6 gigabytes per second to 1 terabyte per second file system processing capability, as well as linear data storage capacity from terabytes to tens of petabytes. And all, with 30% less power and floor space than competitive systems.

Over the past 18 months period, we made significant investments in new products. We launched the new 3.5 inch disk drive platform, the Optimus 2500, a high-density storage platform, the OneStor 2584 and our ClusterStor High Performance Computing storage platform. In addition, we have invested in establishing a new operations facility in Mexico to support a number of our major customers who operate their North American fulfillment activities from there.

In looking forward over the next 18 months, our product roadmap is dominated by incremental product development releases, providing additional functionality, capability and cost of ownership enhancements to our existing major platforms, rather than the development of new platforms. As a consequence, we plan to reduce our R&D spend and associated G&A in a number of areas to reflect this changing product development portfolio.

Offsetting these spend reductions to some extent, will be our increased investments in optimized infrastructure solutions to serve the public the cloud market. Early [ph] in our core technologies and this is low in addressing the HPC sector. We're equally excited by the opportunities in the public cloud infrastructure market. And the targeting for this to be a meaningful part of our overall business in the 2014 timeframe. We see high-growth opportunities within the verticals of the cloud market, estimated at 62% compounded annual growth rate through 2014 by industry research groups.

To service the expanding user demands of the cloud, companies are creating completely new and disruptive business models, which are challenging the traditional supply chain, as well as the way storage is deployed and used. We believe that our business model structure, together with our technology solutions, provide a powerful blend of capabilities that can address these complex needs. Our core expertise in data storage design and test solutions, together with our enterprise-class, highly scalable data storage platforms and significant investment in file systems and management software frameworks provides a compelling product offering to this market. Our expertise in implementing large-scale infrastructures with the power, cooling and build-out implications associated with these from our capital equipment business complements our established strength in the core technology needed in this market.

We're already participating in the cloud market through many of our existing OEMs plus several emerging technology companies. In addition, we're working closely with specific OEM partners who are addressing private cloud applications and utilizing Xyratex technology. We see the solutions needed for the public cloud as an evolution of our business, building on our portfolio of hardware and software technology and core strength in enterprise class storage solutions. In 2013, we plan to announce solutions that are designed to meet the scalability, manageability and reliability needs of the public cloud. These infrastructure solutions are being designed to address the key business needs of the public cloud business models, enabling a viable cost to user and lowering the energy footprint of the cloud by innovations at all layers of the stack, from the base hardware to the software layers, all of which plays a technical strength of the company.

In summary, I remain confident in our ability to benefit from the continued growth of data storage. Disk drives remain the fundamental building block for data storage wherever it may be located, in personal devices, home cloud solutions, enterprise data centers or the public cloud. With our unique position in the market, setting disk drive component suppliers, disk drive providers, enterprise storage providers, High Performance Computing users and soon, public cloud service providers, I believe we are well-positioned to benefit from the growth in the majority of sectors in the market. We are clear in the direction we are taking the business on executing to that plan. We remain focused on our core OEM platform business, where although we expect to see ongoing customer and program transitions. We are seeing a significant market for Xyratex to serve as the leading OEM provider in this space.

We're investing significantly in higher-value solutions through our application platform products and HPC storage solutions, providing optimized solutions for our customers and their end-users. And we see significant opportunity for us to participate in the public cloud infrastructure market, building our core technologies in conjunction with our compelling business model to cloud service providers.

As always, I'd like to thank all our employees worldwide for your ongoing efforts in meeting our customer commitment, executing to our customer requirements, resolving technical challenges and delivering on our product development milestones. Thank you for your continued support, commitment and innovation.

That concludes our formal comments. I would now like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Aaron Rakers with Stifel, Nicolaus.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

First question, you threw a comment out there about softening demand. Can you talk a little bit about, in your EDS SaaS business, both the customer breakdown and then also what you saw particularly in the month of June relative to May, in terms of what obviously is concerns around the demand environment right now?

Richard Pearce

Yes, I mean, first in terms of the customer breakdowns and I think a regular question that you give us every quarter, so we will just cover those for the second quarter. So NetApp was approximately of the enterprise data storage solutions business, 48%, Dell 22%, IBM at 15%. And in fact EMC, which I think has been -- we've identified as really expecting the majority of that business to have gone by now, but that was still at 5% in the second quarter. As we look out and when we talk about the softness, obviously for the quarter, revenues are pretty much in line with our expectation in that side of the business. As we again look out, I guess, into the third quarter and almost into the back half of the year, as per Steve's commentary, we're expecting based on the analyst expectations and now with the estimates that you'll see that we put out there that we're probably $40 million or $50 million lower than those expectations in the third quarter, and overall, I think we gave a number of about $80 million lighter as we go out towards for the whole second half of the year. I mean, much of that, and I think there's been a lot of public information out there recently about our major customer. So a large proportion of that reduction is actually related to that major customer. Steve also commented that around $25 million of that expected $80 million is related to what we talked about beforehand where we haven't been integrating disk drives in certain products because of up until this point, the limitation of certain drives because related to the floods earlier. So we expect -- the expectation is that, that will remain out until the end of the year for this particular customer, these particular drives and not that significant at $25 million, I guess, for the second half of the year. So really those 2 elements where we seeing a softening across the rest of the customer base, pretty much where we expected to be and as far as June in itself, again, with the exception of that specific customer, not really seeing anything different than what we expected, say, 3 months ago.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and then final question would be on the other side of the business. You referenced, obviously, the opportunity to participate in some 3.5-inch investments that are going on. It sounds like you're pretty much almost done with the Western Digital recovery efforts. Can you talk about what you're seeing there in terms of the capacity -- incremental capacity deployments or whether or not the 3.5-inch opportunities are more or less just replacement equipment?

Richard Pearce

I think the 3.5-inch opportunities, which we're currently executing to, still relates to some of the flood recovery work and the new systems that we bought into which kind of coincided with that recovery. As well as a certain amount of systems which were related to the transaction of the Hitachi, WD situation and the Toshiba requirement for certain factories. There's some systems which have been related to that transaction. So we're not necessarily at this stage getting a clear picture of what incremental requirement is required in 3.5-inch. I guess we just get the feeling at the moment in terms of the interest, as well as this equipment we're putting in and the requirement for it to be installed at relatively short notice that the 3.5-inch market is certainly more bullish than the 2.5-inch market, where our perception at the moment is the capacity is more than enough to meet the requirements now, and as we go into third quarter.

Operator

Your next question comes from the line of Glenn Hanus with Needham & Company.

Glenn Hanus - Needham & Company, LLC, Research Division

So let's see, following up a little bit more on the financial questions, in terms of -- I think you made some comments in your introduction there about making up for some of the shortfall in the data storage solutions on the CapEx side. Can you just go over that?

Richard Pearce

Yes, I mean, I think a lot of it is related to the previous question that we are seeing the strength in the 3.5-inch requirements. And if I look at the consensus numbers, which are out there prior to this call for Q3 and in the capital equipment market space, it was around $60 million and a full year number of around $180 million. And I guess given the commentary that we've given now for the full year, my expectations are that, that number is near $230 million, and the majority of that is PO covered. And again, the majority of that is 3.5-inch type equipment. So yes, as we said, while we're seeing some softening on the one side, particularly on one customer, we're seeing some strength on the other side and we're pretty confident that, that revenue will come in this year.

Glenn Hanus - Needham & Company, LLC, Research Division

And the $60 million for this quarter, should that bump up some or...

Richard Pearce

It should, yes. I mean, if I look at the guidance that we provided in the script and in our press release for the quarter, a midpoint of $343 million. Then, I would estimate that around $95 million of that is related to the hard disk drive capital equipment side of things. So yes, quite a step up, actually in the third quarter, which you would expect if we're giving an outlook to $40 million to $45 million or so increase over the year, consistent with previous periods and what you'd expect from the hard disk drive buying sort of cycles that they would be looking for that equipment in the third quarter to meet the requirements that they have in traditionally higher period at the end of the year.

Glenn Hanus - Needham & Company, LLC, Research Division

And then with Western Digital, I thought a good chunk of that was going to come in the fiscal third quarter, but it sounds like that's done.

Richard Pearce

No, a good chunk of that is still coming in Q3. So I think as we talked in previous calls, that the particular system that we are shipping into WD was a new system, the 3.5-inch platform the 3500, which I guess took slightly longer for us to actually qualify and get into production than we would've wished, but we try to accelerate it because of the flood situation. So I think in to these comments, we've now got on top of actually producing the system and getting all the parts in, but we are continuing to ship that system. And that is a relatively new system. We've hardly taken any revenue recognition for that in the first 2 quarters and it's gone through qualification, which some of the earlier units have now been qualified. But we would actually see the revenue for those systems come through, primarily actually in the third quarter.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay, great. Thanks for the clarification there. And then on the gross margins, it sounds like overall, a little bit of uptick versus models. So could you just go through each side of the business? I think you were for the storage business last time guiding for sort of 16-ish% for the rest of the year, and then on the CapEx side, I think you talked 20% to 25% for the second half of the year. Could you update us on that?

Richard Pearce

Yes, I mean, I think, Glenn, that we're not going to be far away from that. I would say on the storage system side of the business, we're probably now looking at between 16% and 17% gross margins as we go into the third quarter and to the back half of the year. And on the HDD side, I would continue around the 20% to 25% as we go into that second half of the year.

Glenn Hanus - Needham & Company, LLC, Research Division

And maybe lastly, could you talk a little bit more about your visibility for the second half ramp on ClusterStor? How much you've -- beyond the Blue Water project, will you have some meaningful revenues from some of the other classic HPC verticals? It's ClusterStor in the second half.

Steve Barber

I think, we are -- in my comments, Glenn, pretty encouraged by the reception we're seeing for that products. Certainly, our relationship with Cray is now starting to bear fruit. We're starting to see a lot of interest in other verticals outside of research facilities. As I mentioned, we're starting to be introduced into oil and gas applications, government opportunities. So we're certainly seeing a lot of interest in the product through their Sonexion brand. And I think it ultimately will come down to the rate at which those inflations can happen, the EVAL [ph] qualification time will create a reasonably wider or wider range towards the back end of this year. But overall, a very steady growth quarter over -- month to month [ph] as we're starting to see more opportunities in that marketplace.

Richard Pearce

This is the first quarter we've actually seen any real revenues from those products, and it's not that material yet. Sort of between $5 million and $10 million in this quarter. But we got relatively good visibility, and as Steve said, some other customers as well as the Blue Waters. But to be relatively open about it, my expectation is that the revenues from that product stream in this year would be a maximum of $50 million. But as we ramp towards the back end and see greater opportunities as we go into next year, so we are relatively happy with that penetration that we're seeing.

Operator

[Operator Instructions] Your next question comes from the line of David Ryzhik with Brean Murray, Carret.

David Ryzhik

Richard, you mentioned gross margin, and just curious what you think would be the biggest influences on GM for the rest of the year.

Richard Pearce

I mean -- yes, say, if we break the business down into the 2 sectors, I guess, it's easiest for me still, at this stage, to speak to that. As far as the HDD capital equipment sector goes, as per my previous comments, the majority of that is PO covered, and therefore, my forecast is 20 to 25 is pretty solid and it's small changes in product mix or whatever there could affect that. But I'm not seeing a huge change in that. And I mean similarly on the enterprise storage solutions side of the business, whilst we have got some new higher revenue business coming in from ClusterStor that I've just spoken about, we again are pretty certain that sort of the mid to maximum level there, that could be in that, and I don't see huge amount of variability on that or for it to take about a significant proportion. Obviously, we talked about the reduction in volume and revenue from NetApp based on their public statements. And I think as most people understand, they are towards the lower end of our margin contributors. So that's slightly helping to push up the margin, if you like, from a percentage basis overall, albeit we're also losing a bit of business from EMC, which was at reasonable margins. So a longish answer to it, but to sort of break it down in short terms, I don't see a huge amount of variability. I've previously, on this call, gave a forecast of 16% to 17% in the storage solutions side of the business, and I don't expect there to be really any variability outside of that. Unless something exceptional happens, never say never, but I think we can be pretty certain at those margin ranges.

David Ryzhik

Right, great. And you mentioned NetApp, obviously, the results probably impacted your view of the rest of the second half as well. Did you say $25 million you were lowering as for a previous estimate based on NetApp?

Richard Pearce

Well, I think, I said overall on the storage solution side as we looked out the second half of the year, and we've never provided estimates in guidance. But just based on what the analysts have out there in estimates that I saw that as being around 80 million down. Any large proportion of that would be related over the second half of the year to NetApp, yes.

David Ryzhik

Great. And last question, you did mention R&D and SG&A. Can you just go over that real quick as for what you think for the rest of the year, how you're going to do some -- what your OpEx will be?

Richard Pearce

I mean, I think, the -- obviously, within the call, we talked about looking to reduce R&D in certain areas and the related SG&A, and that's partially offsetting that will be the new investments that we're putting into HPC spaces and particularly software. I'd say any actions that we may take will happen through the second half of the year and we won't necessarily see any effect of that in 2012. So at this stage, I would expect 2000 expenditure, overall OpEx to remain pretty consistent in the following 2 quarters.

Operator

Your next question comes from the line of Jung Pak with BMO Capital Markets.

Jung Pak

It's Jung Pak for Keith Bachman. I had a question on your HDD CapEx -- Capital Equipment business. The comments you made that the drive supplies improved, and we just had a drive under pre-announced results. How do you -- can you help us understand the increase in your guidance relative to the comments in supply and the pre-announcement today?

Richard Pearce

Hopefully, in my previous comments, relatively clear that the equipment that we have been supplying continues to spiral at the back end of the year are partially related to the flood and partially related to the acquisition and the requirement that WD had in terms of providing a facility to Toshiba, which was up and running on the 3.5 inch platform. And again, at the end [ph] of my comment, I think that we see potentially overcapacity on the 2.5 inch side. So I don't have all the information, but potentially for us to the extent that we are the only player in the 3.5-inch space, and that is still the area that's got capacity requirements and where certain recovery requirements were, that's potentially a disconnect between that and statements that you're seeing from the disk drive companies themselves overall at the moment.

Jung Pak

Okay, fair. Previously, it indicated that you expect about $50 million drive equipment orders. How much of that came in 2Q and how much do you expect in 3Q?

Richard Pearce

Not too much in 2Q. Again, relating back to my previous comments, we've shipped some of the equipment particularly related to the WD flood recovery. But it was the new system and we've not recognized any of the revenue and the majority of the shipments will be going out in 3Q. So the spike that we're seeing in the third quarter up to the midpoint I provided of around $95 million, a lot of that is really related to the $50 million additional, which we gave as an approximate number, I think, in the first quarter. So it's difficult to us to say specifically, but I think about 75% or 80% of that will be in the third quarter and a little bit in 2Q and a little bit in 4Q.

Jung Pak

Okay, great. And lastly for me, any update on Toshiba, given the -- presumably they have higher share aspirations and related-capacity additions?

Richard Pearce

Again, reference to my previous comments, we are a large portion actually of what we're seeing in Q3 and in Q4 is related to Toshiba's requirements as part of the WD acquisition of Hitachi. So there's a reasonable number of machines that we will be providing there over the next 2 quarters. As that -- from our perspective, that's an excellent piece of business, and as you state, as they look to grab more share going in is now one of only 3 and, I guess, overall probably having about 20% of the market share and looking to get a greater proportion of that. Being aligned with Toshiba and having this installed base going in, we see this very positive providing that they are successful in taking that market share. But I couldn't say how they're getting on with that. I kind of leave that to them.

Jung Pak

How do you feel about your position in the 2.5 inch fiber Toshiba.

Richard Pearce

Uncertain at the moment in terms of their requirements. I think, overall, our belief, again, relating to the comments we made is that there is overcapacity in the total market. And at the moment, we are focusing in Toshiba and the 3.5-inch market. We will, obviously, be looking to Toshiba as a potential customer for our 2.5-inch platform, which they don't have any of our 2.5-inch platform today. But as I say, I don't really know what their capacity requirements in there. My general feeling at the moment is that they don't need any additional capacity in 2.5-inch, but I couldn't say that for certain. I -- you would need to ask them.

Operator

[Operator Instructions] Sir, there are no questions at this time.

Brad Driver

All right, Kim. Thank you. I'm sorry -- I'm sorry, thanks, Kim. Once again, I'd like to thank you for joining us this afternoon. We look forward to speaking with you again on our Q3 earnings call which will be scheduled for late September, early October. Also, on October 14, we'll be at the Oppenheimer Annual Conference in Boston. And on September 5, we'll be at the Citigroup Annual Global Technology Conference in New York. As always, you are welcome to call me if you have any additional questions over the course of the quarter. You now have a good weekend. Thanks.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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