Analyst Conference Summary

conference date: August 31, 2010 @ 2:00 PM Pacific Time
for quarter ending: June 25, 2010 (fourth fiscal quarter 2010)

Forward-looking statements

Overview: Another disappointing quarter.

Basic data (GAAP) :

Revenues were $101.6 million, down 6% sequentially from $107.8 million but up 74% from $58.4 million in the year-earlier quarter.

Net income was negative $27.6 million, down sequentially from negative $20.2 million, and down from negative $0.8 million year-earlier.

EPS (earnings per share) was negative $0.91, down sequentially from negative $0.67, and down from negative $0.03 year-earlier.

Guidance:

For full fiscal year 2011, non-GAAP revenue between $550 and $575 million. Gross margin 27% to 30%. Operating expenses $165 to $171 million. EPS break-even.

Conference Highlights:

Full year non-GAAP revenues were $525 million, above plan for $500 million. Cash flow from operations for fy 2010 was $8 million.

Integration of Rackable and SGI during last year has given it an opportunity in the technical computing market. Both government business and commercial cloud business are strong. Diversification across industries is increasing. Only one customer in fiscal year was responsible for over 10% of revenue.

Resuming $40 million stock repurchase program.

Non-GAAP revenue was $122.2 million, down sequentially from $128.9 million but up from $60.5 million in the year-earlier quarter. Non-GAAP gross margin was 24.0%. Net loss was $16.7 million. Non-GAAP net EPS loss was $0.55, improving from a year-earlier net loss of $0.62 per share.

Altix UV shipped to 14 customers. First COPAN systems shipped.

Cash balance ended at $133.3 million, down $15 million sequentially. Deferred revenue ended at $229.6 million.

Cost of revenue was $82.0 million, leaving gross profit of $19.6 million. Operating expenses were $44.3 million. Operating loss $24.7 million. Other loss $3.5 million. Income tax benefit $0.5 million.

COPAN acquisition added about $2 million in increased operating expense. Foreign exchange negative impact in quarter was $1 million.

Inventory increased $13.7 million due to firm orders in hand for Altix UV and Rackable products. $28.5 million shipped but not invoiced.

1325 employees. Now operates in 26 countries.

Revenue by sector: 31% government; 20% Internet; 25% education; 7% manufacturing; 32% service.

Revenue by type: 15% storage; 85% computer.

38% of revenue was international.

Fiscal year 2011 goals include expanding revenues and reaching break even. However, quarter results will fluctuate. One-time expenses should be much less in 2011.

Q&A:

Altix UV shipments, backlog? 14 shipped, many were at the end of the quarter with a variety of acceptances. We are extremely happy with the orders and pipeline growth; it is a fundamental catalyst for the company.

Rackable business gross margins? We have been able to hold our Internet margin profile; Ebay is a new customer. Outside the Internet datacenter market we have been able to improve margins.

Storage revenue as a percent of revenue should grow in 2011, but there is no set target.

Roughly half of Altix UV customers are upgrading from older Altix systems, about half are new customers.

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