Analyst Conference Call Summary

conference date: August 8, 2012 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2012 (fourth quarter, Q4, fiscal 2012)

Forward-looking statements

Overview: Weak quarter as expected, but cutting expenses.

Basic data (GAAP) :

Revenues were $179.5 million, down 10% sequentially from $199.4 million, and down 8% from $195.5 million in the year-earlier quarter.

Net income was negative $18.4 million, down sequentially from negative $1.2 million and down from negative $12.1 million year-earlier.

EPS (earnings per share) were negative $0.58, down sequentially from negative $0.04 and down from negative $0.39 year-earlier.

Guidance:

For Q1 fiscal 2013 ending September 28, 2012, revenue expected between $180 and $195 million, with GAAP EPS negative $0.42 to $0.34, or non-GAAP EPS negative $0.24 to $0.16.

By end of Q1, should have recognized about 40% of low margin backlog.

Conference Highlights:

SGI "introduced a strategic plan designed to drive profitable growth by leveraging SGI's strong market position and technological leadership in technical computing."

One large, low-margin deal slipped into Q1 fiscal 2013.

Trends across markets, notably big data and HPC (high performance computing) are encouraging. Strategic plan includes focus on markets and solutions that have good margins where SGI can enhance its competitive advantage; working better with partners, including application providers; and internal operational efficiency. SGI must prioritize where it invests it resources. Genome sequencing is an area of future focus, for example, as is Life Sciences more generally.

Recently won a Big Data, Hadoop deal in government intelligence; this will be another area of focus. Big Data market is growing at 40% a year.

Will become a full service provider, with complete integrated offerings including applications, whenever possible.

Will do more restructuring in the next few months.

Full fiscal year 2012 revenue was $753 million, up 20% from fiscal year 2011. Half of the growth was due to the SGI Japan acquisition.

Non-GAAP numbers: net income negative $3 million, EPS negative $0.10, down sequentially from $0.11 and from $0.12 year-earlier. Excluded was $15 million mainly for restructuring, stock-based compensation ($2.1 million), and inventory markdowns. EBITDA $1 million.

Cash balance ended at $109 million, up $16 million in the quarter. Line of credit unchanged at $15 million. Inventory $123 million, up $16 million in the quarter, despite a $10 million inventory write-down. Capital expenditures $2 million, depreciation $3 million.

Revenue breakdowns: Public sector 50%, cloud 27% of total revenue. 66% domestic, 34% international . 80% direct 20% channel. There were 2 >10% customers.

Cost of revenue was $142.0 million, leaving gross profit of $37.5 million. Operating costs were $53.1 million, consisting of: $14.9 million for research and development; $21.7 million sales and marketing; $14.2 million general and administrative; $2.3 million restructuring. Operating profit was negative $15.6 million. Other expense $1.6 million. Income tax provision $1.1 million.

Q&A:

Any material new low-margin deals booked in quarter? No. And large deals do not necessarily mean low margins. We are booking large deals with good margins.

UV2 launch? The launch was very successful. First shipment was to Stephen Hawkings. Also shipped a few smaller systems for Life Sciences.

Expecting mid to high digit revenue growth in the current fiscal year. Q1 demand environment points to a growth year for SGI.

We are taking fairly simple tactical initiatives to keep working capital balance. We can do a better job collecting receivables, although given our systems, this will continue to be lumpy. Our inventory number includes deals that have been shipped but not accepted by end of quarter.

Expects a cash burn in Q1, but internal forecasts have a broad range. On a full year fiscal 2013 basis "I would expect to be cash positive."

We have a whole process now to know what the margins of individual deals are before we sign them. We rejected more than a handful of deals in the quarter due to insufficient margins. We are not chasing deals that will be decided solely on a price basis.

Why are you expecting a margin decline in Q1 if there is the same level of low-margin deals? Because even among those, there is a particularly low margin deal with revenue in Q1.

Europe is still unprofitable, even if you back out the restructing costs. However, by later in 2013 EMEA should be at least at non-GAAP break even. One helper is better management of exchange risks.

Asia? The big, low-margin deal that slipped into Q1 was a Japanese customer, which is also why our Asia revenues were weak in the quarter.

SGI is looking to monetize its IP or use it for leverage to expand sales. We have approximately 500 patents, mostly from the SGI side.

Do you feel like you need to raise capital? No. We don't even expect to draw further on our credit line.

Headcount? 1575, up slightly in the quarter. These were incremental, temporary adds at the factory.

The Hadoop products tend to be on Rackable scale-out systems. We are selling these systems now at attractive margins.

Storage segment? Introduced our own storage product, which was delayed about a quarter. Storage is very important to our strategic plan. We now have the product, including specialized software, to increase storage as a percent of total revenue.

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