Analyst Conference Call Summary

conference date: October 30, 2013 @ 2:00 PM Pacific Time
for quarter ending: September 27, 2013 (first quarter, Q1, fiscal 2014)

Forward-looking statements

Note: SGI released disappointing preliminary results on October 10.

Overview: Rough quarter due to government spending issues. Withdrew all guidance.

Basic data (GAAP) :

Revenues were $147.5 million, down 13% sequentially from $170.5 million and down 24% from $192.9 million in the year-earlier quarter.

Net income was negative $6.8 million, down sequentially from negative $4.5 million, but improved from negative $8.7 million year-earlier.

EPS (earnings per share) were negative $0.20, down sequentially from negative $0.13 but improved from negative $0.27 year-earlier.

Guidance:

"Due to current budget uncertainty in the Federal government, the company lacks near-term visibility into expected revenue timing for a large portion of its pipeline and therefore is suspending financial guidance."

Conference Highlights:

Results were consistent with the preliminary results already announced. Core revenue grew, margins are improving. SGI remains focused on HPC (high performance computing), Big Data, and Storage, which are growth markets. Because of the large size and uncertain timing of deals, and Federal uncertainty, "our trajectory is likely to be non-linear." [not in the geometric growth good sense, but in the lumpy sense. - WPM]

The miss on earlier expectations for the quarter resulted mainly from the freezing of funding for a large, multi-part order plus delayed acceptance on a project in Europe. The European project was accepted a few days into the new quarter. We expect, the delayed U.S. order to close this quarter too, but it is not a certainty.

Non-GAAP numbers: net income was $1 million, down sequentially from $6 million, but up from negative $3 million year-earlier. EPS was $0.04, down sequentially from $0.17, but up from negative $0.10 year-earlier. Adjusted EBITDA $5 million, down sequentially from $8 million, but up from $0 year-earlier.

After the quarter ended a new portfolio of Big Data solutions was launched: SGI InfiniteData Cluster, Object-Based Storage Solutions, and LiveArc. FileTek assets were acquired on October 1. New improved support for Hadoop.

Revenue by segment: Compute $88.8 million; Storage $20.0 million; Service $38.7 million.

Legacy cloud infrastructure business declined to $14 million. SGI is withdrawing from this low-margin business.

ICE X pipeline now includes a U.K. deal valued at $30 million, but won't see revenue until fiscal Q4. In Q1 recognized expanded NASA system revenue.

UV product line had best revenue quarter in the year, with wins in U.S. and Japan, including 25 small UV configuration wins.

67% of total revenue came from the public sector, 33% from commercial. 34% of revenue came from outside the U.S. 85% was from direct sales, 15% from partners. One greater than 10% customer.

Cash and equivalents balance ended at $160.1 million. There is no debt. $2 million in capital expenditures. $4 million for depreciation and amortization. Share repurchases used about $3 million of cash.

Cost of revenue was $109.3 million, leaving gross profit of $38.2 million. Operating expenses of $45.4 million included: $14.8 million for research and development; $17.6 million sales and marketing; $12.5 million general and administrative; $0.5 million restructuring costs. Leaving income from operations of negative $7.2 million. Other income was $0.3 million. Income tax benefit of $0.1 million.

The workforce was reduced by 6% during the quarter.

With a new budget deadline just 3 months away, government agencies will likely continue to be cautious in their commitments to new supercomputer projects.

Q&A:

Given some federal orders are starting to flow back, if there is no new shutdown, outlook? We have talked to customers about deals we are pursuing. We have gotten no additional clarity since October 10 pre-announcement.

Federal starting to improve? Federal is starting to release funds, but we would not call it improvement. Federal programs are under a lot of scrutiny. We are also trying to expand the number of agencies we sell to.

Slipped federal deal? Right now it had been approved for funding, but we are not the prime contractor. They are making an effort to get the funds released before the end of the calendar year.

Percentage of revenue from federal in the quarter? 51% to 52%.

December quarter non-federal? It is tracking close to what we anticipated at the start of the year. Core non-federal business is growing in storage, UV. The outlook for growth in different geographies is strong.

We are still confortable with a 28% gross margin model. We benefitted in the quarter from improved service margin.

Reinforcing beginning of October 10% reduction statement, vs. current lack of visibility? We hoped to have better visibility by now. We are not saying anything about changing a number up or down. The likelihood of a downside is greater than the likelihood of an upside, compared to October 10 statement.

We have heard that multi-year funded projects should be good to go.

We are probably going to add $30 million to $35 million in inventory in the second quarter to prepare for the second half revenue ramp.

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