Analyst Conference Call Summary

conference date: April 30, 2013 @ 2:00 PM Pacific Time
for quarter ending: March 29, 2013 (third quarter, Q3, fiscal 2013)

Forward-looking statements

Overview: "We are now positioned to achieve consistent quarterly non-GAAP profitability."

Basic data (GAAP) :

Revenues were $232.6 million, up 36% sequentially from $171.2, and up 17% from $199 million in the year-earlier quarter.

Net income was $9 million, up sequentially from $1.1 million, and up from negative $1 million year-earlier.

EPS (earnings per share) were $0.27, up sequentially from $0.03 and up from negative $0.04 per share year-earlier.

Guidance:

Fiscal Q4 revenue will drop to $170 to $185 million as low-margin deal pipeline had been completed. GAAP EPS negative $0.34 to negative $0.29 dues to $12 million restructuring and severance charges and $4 million stock-based compensation. Non-GAAP EPS $0.12 to $0.17.

Full fiscal 2013 revenue around $775 million with Non-GAAP EPS $0.30.

2014 will be difficult to predict due to timing of customer decisions.

Conference Highlights:

Results were at the high end of prior guidance. The quarter included $50 million in low margin deals; those should be the last. Goal is for non-GAAP operating margin of at least 5% exiting calendar year 2013. Biggest challenge is global macro economy and government spending cuts.

Will continue to invest in high-growth markets, notably Big Data and high-performance Tier-2 storage.

Recognized revenue on one large deal in the quarter, excluding the final 2 low-margin deals.

After the quarter ended, on April 22, SGI InfiniteStorage Gateway was introduced. On March 25 Total S.A. announced it would purchase an SGI ICE X HPC system for its new gas and oil exploration supercomputer.

Will be moving to contract manufacturing to reduce costs.

Non-GAAP numbers: net income was $6 million, up 100% sequentially from $3 million, and up 50% from $4 million year-earlier. EPS was $0.18, up 80% sequentially from $0.10, and up 64% from $0.11 year-earlier. Adjusted EBITDA $9 million, up sequentially from $7 million.

The UV 2 product pipeline built 9% sequentially.

89% of revenue was from compute, 11% was storage. Public sector 55%; cloud 14%; other commercial 31%. 85% direct sales, 15% channel. 3 >10% customers.

Shipped 8% market share of Hadoop clusters. Believes will reach higher volumes over time.

ICE X pipeline expanded 30% sequentially to over $400 million. Completed a federal deployment in the quarter.

Storage pipeline increased 6% sequentially. Believes InfiniteStorage Gateway will bring major new opportunities due to its price performance and tiered model, with first shipments this quarter.

Cash and equivalents balance ended at $153 million, up $33 million in the quarter. SGI has no debt. Inventories dropped $71 million to $76.3 million. Deferred revenue declined substantially in the quarter. Just $1 million in capital expenditures in quarter. Repurchased under $1 million of stock.

Cost of revenue was $180.1 million, leaving gross profit of $52.5 million. Operating expenses of $51.0 million included: $15.5 million for research and development; $19.8 million sales and marketing; $14.9 million general and administrative; $0.7 million restructuring costs. Leaving income from operations of $1.5 million. Other expense was $0.4 million. Income tax benefit of $8.1 million.

Added key hires, which compensated for some of the decrease in operating expense. Expects completion of restructuring to result in $42 to $44 million non-GAAP operating expenses per quarter.

Will be thoughtful and disciplined about use of cash, but will invest for growth and efficiency. Will still be able to return cash to shareholders.

Q&A:

Cash use, contract manufacturing strategy? Not aggressive about stock repurchases yet because move to contract manufacturing will be gradual.

Gross margins in June? Expects range to be 28 to 29%. Excluding low margin deals March quarter was 30%, but can't count on that rich of product mix this quarter.

Public sector growth in quarter? So far from sequester, the first trigger was March 1, so saw no effect in the quarter. We are seeing slight reduction and push outs in project budgets. That might change in September. Some federal business slipped from December quarter to March quarter because of nervousness about budgets.

2014 tax rate is hard to predict because of NOLs (net outstanding loss credits), but if had to predict would say $500 thousand and $750 thousand per quarter.

Linearity in quarter? Normal. Recall that the large deals make the business fairly lumpy when viewed by quarter.

Competitive landscape? Competitors seem similar by market and size of deal. No obvious changes.

Growth in SMP vs. clustered workloads, particularly Microsoft SQL Server? Assured UV memory product pipeline doubled from a small number. Benefit is to customer problems that need a unified memory rather than a cluster. We are very pleased with UV2 pipeline growth. We need more applications that take advantage of UV, so can run faster than on a cluster. We want UV to be more commercially appealing, rather than just science.

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