Analyst Conference Call Summary

conference date: May 9, 2012 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2012 (third quarter, Q3, fiscal 2012)

Forward-looking statements

Overview: Strong quarter, still in the red by GAAP, but strong non-GAAP EPS. However, lowered guidance for June quarter.

Basic data (GAAP) :

Revenues were $199.4 million, up 2% sequentially from $195.2 million and up 39% from $143.7 million in the year-earlier quarter.

Net income was negative $1.2 million, up sequentially from negative $2.3 million and also up from negative $1.7 million year-earlier.

EPS (earnings per share) were negative $0.04, up sequentially from negative $0.07 and up from negative $0.05 year-earlier.

Guidance:

Fiscal Q4 ending June 2012 revenue $177 to $197 million, with gross margin around 20%. GAAP EPS negative $0.71 to $0.56; non-GAAP EPS negative $0.52 to $0.37.

Guidance for full fiscal 2012 is lower because of a large deal slipping to Q1 fiscal 2013, and product delays that will also shift some revenues to Q1. More than usual large deals with low gross margins are also expected in the quarter.

Conference Highlights:

New CEO Jorge Titinger is developing a plan for fiscal 2013 that will be announced later. Changes need to be made, including driving more profitable growth by better pricing. Deals will be reviewed to optimize margins.

Non-GAAP numbers: EPS $0.11, up from $0.04 year-earlier. Net income $3.7 million. Excludes $3.6 million in share-based compensation and $1.2 million for amortization of intangibles.

High performance computing (HPC) market is expected to grow at 8% a year for the next 4 years. SGI can also deliver for "big data" computing including Hadoop.

Making progress on restructuring in Europe, which will reduce costs in the region by $7.5 million per year.

Working to improve cash conversion cycle, as it can take several quarters to get paid for bigger deals.

Public sector growth was strong. Was 61% of revenue. Cloud was 19%, manufacturing 8%.

$93.2 million cash and equivalents, down sequentially from $95.1 million. Borrowed $15 million to fund working capital.

Had two >10% customers

Direct sales 87%, channel partners 13%.

87% computer, 13% storage by revenue. Products contributed 75% of revenue and services 25%. International 40%, U.S. 60%.

New storage product delayed, will come available for sales in June.

Is now refusing deals with margins that are too low.

Accounts receivable hit $138.2 million, up $18 million in the quarter.

Q&A:

Large deals with margin impacts? About $87 million in revenue at single-digit margins on average. These are mostly ICE-X product line. Initial wins for these HPC clusters had aggressive pricing.

Backlog? Book-to-bill? Will not discuss in this call, but will on next call.

Specific large deal that slipped for Q4? It is one of the nine deals mentioned, single digit margin.

Thoughts on margins for large deals? There has to be a balance between revenue and profitability. The deals were booked when we were focused on top line growth. There has been a lack of margin visibility at time of booking. Now we have systems in place to see the margins and cash flow. Our historic margins are in the mid to high 20s. So in future margins should be better than we are reporting today.

Rationalizing costs, plans for? We had 1550 employees end of quarter. We will focus on verticals and products that have both growth and good margins. We will discuss this in detail on next call.

We are looking at being profitable in fiscal 2013.

Commercial cloud business tends to be at lower end of margins, and that business has been growing, and is concentrated in the Americas. Service business is more profitable for us. In Europe we had a better mix of service to products, and a better product mix, so we did better there.

For fiscal 2013, we think the first half will have margins in the low 20s but the last half should have margins in the high 20s. In Q4 we will see some decline in service margins.

Pricing issues? HPC space is competitive. But our competitor margins are in the high 20s to low 30s. There is no reason we should not be in that margin range.

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