Analyst Conference Call Summary

conference date: January 28, 2015 @ 1:30 PM Pacific Time
for quarter ending: December 26, 2014 (second quarter, Q2, fiscal 2015)

but did in the past
Forward-looking statements

Overview: May have bounced off the bottom, but still in the red.

Basic data (GAAP) :

Revenues were $138.2 million, up 24% sequentially from $111.7 million and up 19% from $116.1 million in the year-earlier quarter.

Net income was negative $10.4 million, down slightly sequentially from negative $10.3 million but up from negative $14.9 million in the year-earlier quarter.

EPS (earnings per share) were negative $0.30, flat sequentially from negative $0.30 and up from negative $0.40 year-earlier.

Guidance:

For the fiscal third quarter (March quarter) revenue is expected between $120 and $130 million, with GAAP net loss between $9 and $5 million and non-GAAP net loss between $4 million and zero. GAAP EPS negative $0.25 to $0.15; non-GAAP EPS negative $0.10 to $0.00.

Interest on the new loan is expected near $1.75 million per quarter. Non-cash amortized loan origination cost will be $0.25 million per quarter.

The fiscal fourth quarter is expected to ramp revenue so that the second fiscal half range is $290 to $310 million. [WPM: I'll believe it if I see it. SGI is famous for missing guidance]

Both of the large DoD deals should produce revenue by the end of the fiscal year.

Conference Highlights:

Revenue was better than expected and achieved non-GAAP break even.

Received large project awards in the quarter. First revenue from a UV 300H system. Highest level of bookings in nearly 3 years.

Making progress selling into commercial vertical markets. Won several automotive and oil deals.

Large deals were a much bigger percent of billings than in the past.

Got a term loan for $70 million to help build large systems, which have long cycle times. The interest rate is 10%.

Two of the awarded contracts were from the Department of Defense for ICE X supercomputers with InfiniteStorage. There was also a ICE X order from the Czech Republic. CUNY ordered a UV 300 system for solving graph theory problems.

Non-GAAP numbers: net income was $0.1 million, up sequentially from negative $5 million, and up from negative $7 million year-earlier. EPS was $0.00, sequentially from negative $0.14 and up from negative $0.20 year-earlier. Excludes share-based compensation of $4.2 million, $1.3 million amortization, $3.8 million restructuring expense, and $1.3 million other expense. 28.2% gross margin.

EBITDA was $3 million.

Core revenue was all but $1 million of revenue. Federal revenue was $72 million, up 63% y/y. Service revenue was $37.9 million. $65 million was outside the U.S.

% of revenue from data storage systems was not stated.

2 greater than 10% customers in the quarter.

Cash and equivalents balance ended at $84 million, down $10 million sequentially from $94 million. Debt was $15 million.

Cost of revenue was $101.3 million, leaving gross profit of $36.8 million. Operating expenses of $46.8 million included: $14.8 million for research and development; $16.8 million sales and marketing; and $15.3 million general and administrative. Leaving income from operations of negative $10.0 million. Other expense was $0.3 million. Income taxes $0.1 million.

Headcount was 1,100, flat sequentially.

Q&A:

UV300H, has revenue been recognized yet? A few deals have now closed and produced revenue. One deal worked very fast. Others have been PoC, proof of concept, which takes longer to turn into revenue. The larger the deal, the longer it takes.

Were you asked to improve your working capital by federal agencies? It was initiated within SGI, as a prudent step, as we looked at our pipeline schedule.

Financing to support future deals only? No, it helped support the large DoD deals.

Gross margins, how is it mix driven? More product in the quarter, which is lower margin than the services business.

Did revenue in the quarter pull in from March? No. The pipeline is usually larger than the guidance number. Some orders just converted to revenue faster than we had in our guidance, driven by customers.

Bookings numbers going forward, the prior $700 million statement? We feel good about winning the business. We are ahead of plan on large deals. Our conversion rates are good. We are confident on our revenue guidance for Q4, we are working diligently to get the deals done in Q4.

We are being very diligent about not letting costs creep back up, after working so hard to get them out.

The loan closed yesterday, so $0.04 per share this quarter, then $0.05 per quarter until we start to pay it down.

Service margin in the quarter? Non-GAAP we are down about 280 basis points, mainly because some positive points in Q1 were lost in Q2. We are aiming for a service margin in the 40s.

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