Analyst Conference Call Summary

conference date: April 30, 2014 @ 2:00 PM Pacific Time
for quarter ending: March 28, 2014 (third quarter, Q3, fiscal 2014)

Forward-looking statements

Overview: Another bad quarter. Guidance to a bad June quarter too. Heavy cash burn.

Basic data (GAAP) :

Revenues were $124.3 million, up 7% sequentially from $116.1 million but down 47% from $232.6 million in the year-earlier quarter.

Net income was $negative $21.9 million, down sequentially from negative $13.7 million and down from $9.2 million in the year-earlier quarter.

EPS (earnings per share) were negative $0.64, down sequentially from negative $0.40 and from $0.27 year-earlier.

Guidance:

For fiscal Q4 ending June 27, 2014 revenue is expected between $135 million and $145 million. GAAP net loss is expected between $8 and $11 million, for EPS of negative $0.23 to $0.30. Non-GAAP net loss is expected between $3 and $6 million, for EPS of negative $0.08 to $0.15.

Core, non-Federal revenue is expected to be up 60% y/y in Q4.

Conference Highlights:

Q3 was within expectations. Outside of federal government space, revenue was up 24% sequentially and up 11% y/y. So the non-government part of the HPC (high-performance computing) business has turned around. Federal intelligence related spending remains weak.

Non-GAAP numbers: net income was negative $7 million, flat sequentially from negative $7 million, and up from $6 million year-earlier. EPS was negative $0.22, down sequentially from negative $0.20 and down from $0.18 year-earlier. 28.6% gross margin.

"Core" revenue, which excludes legacy cloud infrastructure and low-margin deals, was $122 million, up sequentially from $107 million, but down from $152 million year-earlier. Legacy cloud revenue was $2 million. SGI continues to exit this business.

Federal government core revenue dropped to $45 million, up from $44 million sequentially, but down from $82 million year-earlier. Federal business is expected to be flat in Q4.

Non-federal core revenue was $77 million, up 24% sequentially from $62 million, and also up from $69 million year-earlier.

Products were 69% of revenue. Revenue by segment: Compute 85% of total product revenue; Storage 15% of product revenue.

Service generated 31% of revenue.

Public revenue was 74% of total; commercial 26%.

Domestic revenue was 42% of total; international 58%.

ICE X had a good quarter, including an oil & gas win against all 4 of SGI's principle competitors. Expects this to become the leading product line in 2014. The ICE X pipeline is now at $800 million.

UV product line revenue roughly doubled sequentially. 3 large UV systems in Japan had revenue recognized in the quarter. Believes UV will have strong growth going forward, partly because of the SAP appliance. The new 300 family is designed to maximize memory density; should launch in June, with first revenue in March 2015 quarter. 97 small UV systems have been placed so far this year.

Two greater than 10% customers.

Cash and equivalents balance ended at $80 million, down $38 million sequentially from $118 million. There is no debt. $3 million in capital expenditures. $4 million for depreciation and amortization. $0.24 million was used to repurchase stock; $19 million more is authorized for 2014. SGI expects cash to rebound to approximately $100 million in the June quarter due to collections on large systems.

Cost of revenue was $93.2 million, leaving gross profit of $31.1 million. Operating expenses of $52.9 million included: $17.3 million for research and development; $19.1 million sales and marketing; and $16.4 million general and administrative. Leaving income from operations of negative $21.8 million. Other income was $0.5 million. Income tax $0.5 million.

Believes three initiative will drive growth going forward. One is to focus on large deals, particularly in the federal space. Two is to execute well on the UV SAP appliance. Three is getting the cost structure under control.

IBM's exit from the x86 supercomputer space should be a major opportunity for SGI.

Q&A:

What happened to your expectations of federal intelligence sales of 90 days ago? In our traditional federal areas, DoD and Intelligence, we are seeing slower fund releases and more project scrutiny. But activity, planning anyway, is starting to ramp up. Outside, in federal civilian, we are beginning to make progress, but the sales cycles are long. We should start to see better numbers in fiscal 2015. When the budget was finally passed, it still took time for Intelligence to get its priorities settled. The word we keep hearing in this space is "scrutiny."

Operating expense, given lack of visibility on revenues? It is premature to predict 2015 op ex. We have to balance our need to prepare to sell new products against our need for economy.

We are putting processes in place to drive the sales of larger systems, including taking advantage of the IBM exit.

We have a $1.6 billion pipeline, of which half is Ice X.

Federal less Intelligence in September quarter? It is more dominated by large deal wins than seasonality. It depends on when they get to revenue, given the lengthy sign-off routines.

OpenIcon Analyst Conference Summaries Main Page
SGI Investor Relations page
www.sgi.com
Openicon SGI main page

Search

More Analyst Conference Pages: