Analyst Conference Call Summary

conference date: August 7, 2013 @ 1:30 PM Pacific Time
for quarter ending: June 28, 2013 (fourth quarter, Q4, fiscal 2013)

Forward-looking statements

Overview: Not great, but non-GAAP net income was in the black. Guidance for September quarter is weak.

Basic data (GAAP) :

Revenues were $170.5 million, down 17% sequentially from $232.6 million and down 5% from $179.5 million in the year-earlier quarter.

Net income was negative $4.5 million, down sequentially from $9 million, but up from negative $18.4 million year-earlier.

EPS (earnings per share) were negative $0.13, down sequentially from $0.27, but up from negative $0.58 year-earlier.

Guidance:

For the September quarter (first quarter fiscal 2014) revenue is expected to decline to a range of $160 to $170 million. GAAP EPS expected between negative $0.14 and negative $0.07. Non-GAAP EPS from positive $0.07 to $0.14.

Sequential decline is attributed to legacy cloud infrastructure, about $25 to $30 million, partly offset by HPC and storage.

Believes revenue will be back-end loaded in the fiscal year due to large projects and the ramp of the storage products. Hopes to deliver $1 per share non-GAAP for full fiscal year, but much of that will come from the second half. Will continue to cut SG&A, but spend $10 to $15 million for capital expense for new IT systems.

Conference Highlights:

"Repositioning SGI for more profitable growth in fiscal 2014." [WPM: heard that before] CEO Jorge Titinger stated: "In fiscal year 2014, we expect to achieve solid double-digit revenue growth in our core high-performance computing (HPC), storage, and Big Data solutions, while managing the run-off of our lower margin legacy cloud infrastructure business. We are on track with our operational and financial objectives for the year, including further improvement in profitability, however because of the timing of many large deal opportunities as well as the ramp of new products, we expect our financial performance to be weighted toward the second half of the fiscal year."

Revenue was at low end of guidance range, but improved margins resulted in hitting mid-range of EPS guidance. The sequential revenue drop was because of the end of the large low margin deals.

Non-GAAP numbers: net income was $6 million, flat sequentially from $6 million, but up from negative $3 million year-earlier. EPS was $0.17, down 5% sequentially from $0.18. Adjusted EBITDA $8 million, down sequentially from $9 million

There was a $0.03 benefit, both GAAP and non-GAAP, from the year-end true-up of taxes.

Core federal business was up 19% in year. Weakness was worst in Japan. Booked Hadoop deals with a major federal intelligence account. Also doing well with NASA. Believes government is a growth area for HPC, but timing is impacted by the lack of a federal budget and by sequestration.

Jabil was selected on July 1 for manufacturing services and supply chain management. This should reduce costs over time and allow for higher volumes without capital investments.

SGI has become a leader in the Hadoop space and is continuing to innovate.

ICE X pipeline doing well. Includes the largest commercial supercomputer in the world. Revenue of $100 million in fiscal 2013; expecting at least $120 million in fiscal 2014.

Storage pipeline is seeing multiple orders for the new products, initial shipments are occuring in the present quarter and should make a meaningful contribution to revenue in the second half of fiscal 2014.

Cash and equivalents balance ended at $175.2 million, up $22 million sequentially from $153 million. There is no debt. $1 million in capital expenditures.

Legacy cloud customer revenue was up, but margins are down as the cloud business commoditizes. Not investing in the segment, so revenue in the segment is likely to decline in fiscal 2014.

Revenue by segment: 52% public, 27% cloud, 21% commercial.

Two customers exceeded 10% of revenue.

Cost of revenue was $123.7 million, leaving gross profit of $46.8 million. Operating expenses of $52.1 million included: $15.6 million for research and development; $19.7 million sales and marketing; $12.8 million general and administrative; $4.0 million restructuring costs. Leaving income from operations of negative $5.3 million. Other expense was $0.3 million. Income tax benefit of $1.0 million.

SG&A expense was reduced through workforce restructuring.

Q&A:

Large deal pushed out of quarter? Will be in September quarter.

Guidance, public cloud infrastructure color? These are low margin businesses. The particular customer wants to do business at even lower levels. The business has become unattractive for us. The decline would be around $25 million, but will replace with other, better margin, business like Ice X. We are in ongoing conversations with the customers to see if there are value-added services that we can provide in line with our margin requirements. So we are not chasing the revenues, or large volumes of low-margin business.

UV business is now seeing pipeline growth. We have $200 million of pipeline, but not all of it will convert in fiscal 2014.

We can still do large deals that are in line with our business model.

Federal side visibility? We have pretty good visibility. We pursue large deals. Many have implementation time lines for the second half of fiscal 2014. We tend to book in the first half, recognize revenue in the second half. We are being encouraged to bid on more and larger projects.

The cloud infrastructure decline is large in revenue, $25 to $30 million, but has only a small impact on earnings.

How much will Jabil help with margins? Over time history would suggest a 1 to 2% point improvement in gross margins, but how much we would get in fiscal 2014 is not known.

More restructuring in future? $20 million in op ex and $5 million in COGS we did last year was surgical. Coming year is more pruning around the edges. IT systems improvement should enable the next round of cost optimization. We are not just taking costs out, we are reinvesting.

As to fiscal 2014 timing, non-GAAP EPS would be 2/3 in the second half, 1/3 in the first half.

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