Analyst Conference Call Summary

conference date: January 30, 2013 @ 2:00 PM Pacific Time
for quarter ending: December 28, 2012 (second quarter, Q2, fiscal 2013)

Forward-looking statements

Overview: Revenue down on project delays due to fiscal cliff fears. Despite that, a profitable quarter.

Basic data (GAAP) :

Revenues were $171.2, down 11% sequentially from $192.9 million and 12% from $195.2 million year-earlier.

Net income was $1.1 million, up sequentially from negative $8.7 million, and up from negative $2.3 million year-earlier.

EPS (earnings per share) were $0.03, up sequentially from negative $0.27, and up from negative $0.07 year-earlier.

Guidance:

For fiscal Q3 2013 ending March, 2013 revenue is expected between $200 and $230 million, but that will include up to $50 million of low-margin deals. GAAP EPS negative $0.12 to negative $0.06. Non-GAAP EPS $0.12 to $0.18.

$400 to $450 million revenue in second half of fiscal 2013, which also includes the $50 million in the 2 large, older, low-margin deals.

Conference Highlights:

Solid results are consistent with preliminary results announced on January 15. SGI is making significant progress in its turnaround efforts to achieve profitability through higher margins.

SGI is still working on improving profit margins, with completion goal by the end of 2013. Shifting to a contract manufacturer. Expanding sales force in Big Data, media and entertainment, and manufacturing.

The UV product pipeline increase 29% in the quarter. Hadoop program going very well. ICE X pipeline improved sequentially.

Non-GAAP numbers: net income $3 million, EPS $0.10. Up from $0.04 year-earlier. Adjusted EBITDA $7 million.

Revenue included $70 million in advance and milestone payments. This included $30 million in December that were not expected until January. Recorded as deferred revenue.

Product revenue was 75% of total revenue. Within products compute was 88%, storage 12%.

A non-cash tax benefit was included in GAAP net income but excluded from non-GAAP net income (and EPS).

In November SGI won a contract with Central Research Institute of Electric Power Industry of Japan, which plans to create a very large, very fast system.

After the quarter ended a $15 million stock repurchase plan was announced. Cassio Coneivao was appointed Executive Vice President and Chief Operating Officer. SGI announced a storage OEM partnership with Scality.

Cash and equivalents balance ended at $128 million, up $17 million in the quarter. Inventories ended at $146.9 million. Fully paid down line of credit; no debt. $1 million capital expenditures, $4 million depreciation and amortization.

Revenue % by market segment: public sector 47%; cloud 22%. One customer represented greater than 10% of revenue.

Cost of revenue was $123.7 million, leaving gross profit of $47.6 million. Operating expenses of $50.4 million included: $15.5 million for research and development; $19.7 million sales and marketing; $12.4 million general and administrative; $2.9 million restructuring costs. Leaving a loss from operations of $2.9 million. Other income was $0.1 million. Income tax benefit $3.9 million.

Evaluating patent assets and filing new patents. Looking to monetize non-core patents, but the monetization is likely to be modest.

Ended with 1450 full time employees, down 42 in the quarter.

Q&A:

In March quarter, how did you get the EPS? Range assumes both low-margin deals will be recognized in Q3. These deals are barely break-even to slightly unprofitable, so a delay would actually improve EPS.

DataRaptor line? The one announced partnership is with MarkLogic. We both believe it is a very attractive Big Data market. We will work with other potential partners under the DataRaptor umbrella.

$43 to $45 million op ex range? We were below expectations in op ex in the first half by $1 or $2 million. Depending on the level of investment, we could see Q4 being more like $44 to $46 million.

UV pipeline? UV 2000 startup was slow, but building momentum each quarter. We are selling internationally and to commercial accounts as well as to traditional clients.

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