Analyst Conference Call Summary

conference date: October 29, 2014 @ 1:30 PM Pacific Time
for quarter ending: September 26, 2014 (first quarter, Q1, fiscal 2015)

but did in the past
Forward-looking statements

Overview: Bad quarter, missing low end of prior guidance, which was quite dismal to begin with.

Basic data (GAAP) :

Revenues were $111.7 million, down 21% sequentially from $142.1 million and down 24% from $147.5 million in the year-earlier quarter.

Net income was negative $10.3 million, up slightly sequentially from negative $10.4 million and down from negative $6.8 million in the year-earlier quarter.

EPS (earnings per share) were negative $0.30, flat sequentially from negative $0.30 and down from negative $0.20 year-earlier.

Guidance:

For the fiscal year ending June 26, 2015 "The company remains on track toward its goal of winning approximately $700 million of business," but the actual revenue range is between $525 and $575 million, and in addition the revenue is expected to be back-end loaded. the resulting GAAP loss will be $15 to $28 million, or EPS of negative $0.43 to $0.79 per share. Non-GAAP net income is expected to exclude $25 million of adjustments, and so be positive.

Q2 fiscal 2015 ending in December revenue expected between $120 and $130 million, with a GAAP net loss of $12 million to $15 million and a non-GAAP net loss of $3 to $6 million or $0.09 to $0.17 per share.

Conference Highlights:

"Results for the quarter were consistent with our expectations and with our full-year outlook," said Jorge Titinger, president and CEO of SGI. "First quarter revenue was negatively impacted by late material constraints that resulted in approximately $6 million of revenue being recognized in the first week of our fiscal second quarter." [WPM: in other words, we missed the low end of the range of revenue guidance because ...]

Believes is on track for strong growth in federal business, as shown by bookings.

Non-GAAP numbers: net income was negative $5 million, down sequentially from negative $0.5 million, and down from $1 million year-earlier. EPS was negative $0.14, sequentially from negative $0.01 and down from $0.04 year-earlier. 29.9% gross margin, up due to lower manufacturing costs.

Core revenue was $111 million, down 21% sequentially and 16% y/y. Federal core revenue was $61 million.

Legacy cloud business revenue was $1 million. Should drop to zero soon.

23% of revenue came from data storage systems.

ICE X, after the quarter ended, in fact the day of this conference, the DoD awarded SGI a $27 million contract with the Supercomputing Resource Center. Won over the two leading supercomputer vendors.

Recounted other large deals won [WPM: but for supercomputers, all deals are large deals.]

UV300 HANA appliance is expected to generate revenue in the second half of fiscal 2015. Already establishing a pipeline of deals, with four SAP deals already booked.

SGI hopes to replace IBM in certain x86 and Blue Gene accounts now that the x86 business has been sold to Lenovo and Blue Gene is being discontinued. Won two large deals at NASA.

In the quarter only one customer represented greater than 10% of revenue.

Expects to decrease operating expenses by 5% in fiscal 2015 while continuing to invest in key initiatives where SGI is differentiated from the competition.

Cash and equivalents balance ended at $94 million, down $20 million sequentially from $114 million. Inventories increased to $65.4 million. Accounts receivable $76.7 million. There is no debt. $1 million in capital expenditures. Depreciation and amortization was $3 million. $1.1 million was used for share repurchases.

Cost of revenue was $79.3 million, leaving gross profit of $32.4 million. Operating expenses of $42.5 million included: $13.2 million for research and development; $15.9 million sales and marketing; $13.3 million general and administrative; and $0.1 million restructuring. Leaving income from operations of negative $10.1 million. Other income was $0.1 million. Income taxes $0.3 million.

Operating expenses dropped due to headcount reduction and general discipline.

Q&A:

SAP HANA ramp? It is our first entry to that market, qualified at 4 and 8 sockets. We are working closely with SAP. We anticipate a nice growth path into the following fiscal year. We are working on qualifications for the bigger systems. We don't know how long the sales cycle is yet, but we are talking to many potential customers. The first half of fiscal 2016 is likely to be when revenue ramps, with orders ramping in 2nd half of fiscal 2015.

Defense orders? Yes, we are getting more defense orders, and intelligence continues to be a strong sector for us.

IBM x86 pipeline? For many customers we are seeing Lenovo replace IBM, but some customers want a U.S. based supplier, as shown by our NASA win. The Blue Gene replacements have nothing to do with Lenovo, rather from IBM discontinuing it.

Pricing dynamics in market? None of our competitors sell out of a price list. The systems are complex and highly configured. The question is are we getting the margins we want. We continue to be able to compete with margins that we expect in areas where we have an established market. Price competition is deal by deal.

8 socket vs. 16 and 32? Only about 5% of the customers are 8 and above, but they are the largest customers. They want to buy the entire solution from a single vendor. It will be more competitive in the 4 socket space.

Late material constraints in the quarter, details? It was a single customer order, inability to get 3rd product drives and switches, the distributor delivered at the end of the month.

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