SGI Sees Revenue, Profit Growth in 2012

August 22, 2011

Silicon Graphics International (SGI) sells data processing systems with a focus on technical computing. Their high-end systems are used to solve some of the toughest computational problems encountered by government and industry. They also provide datacenter equipment for cloud computing to companies like Amazon.

The new SGI is basically a combination of the old Rackable Systems, which specialized in datacenter server systems, and the old, bankrupt SGI, which specialized in high-performance science computing. I had my doubts when the two companies merged, but the new company turned out to be better at executing than either of the old companies.

The transformation of SGI is about technology, sales, and profit margins. In last Thursday's report on fiscal Q4 2011 (ending June 24) we saw record revenues for the typically slow Q4. Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier. While GAAP net income was negative $12.1 million, non-GAAP net income was $3.9 million. Of course I would prefer to see GAAP net income in the black. In this case the difference is largely due to non-cash operating expenses, restructuring, and software revenue recognition rules (because the computer systems have software bundled with the hardware). As a check on the merits of GAAP vs. non-GAAP, the cash balance was up $9.4 million in the quarter.

SGI is debt-free and had a cash and equivalents balance of $143 million at quarter's end. They can fund a strong R&D effort and could make acquisitions if needed.

The new Altix UV supercomputer line has no real direct competitors. It has a memory and processor model that make it very attractive to high-end technical users. Because of that profit margins are good. The rackable systems for server farms and cloud computing continue to offer innovative designs, but margins have been improved there as well.

The company is now truly international, which is important when your key products are supercomputers. Service revenue is also a key factor in the new, profitable business model.

In response to questions from analysts management went into some detail, and speculation, about technologies they are developing. They are working with Microsoft to expand the capabilities of SQL Server. They believe that for certain types of computing they will be able to deliver performance equivalent to Oracle's Exadata systems at about one-third of Oracle's current price. Considering how successful Exadata has been, both in terms of compute ability and revenue generation, that could be highly significant in 2012.

Analysts also speculated that with budgets thin, SGI might have difficulty selling its computers to government agencies. However, SGI has little or no exposure to state and local governments in the U.S. Federal agencies still seem eager to decrease their other costs by upgrading their compute capabilities. For industry, the total cost of the design process is decreased by buying more computational power.

While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.

For more details on quarter results, see my SGI Q4 fiscal 2011 analyst call summary.

The usual risks apply, so keep diversified!

William P. Meyers