Analyst Conference Summary

Silicon Graphics International

conference date: November 4, 2009 @ 2:00 PM Pacific Time
for quarter ending: September 25, 2009 (first fiscal quarter 2010. See SGI fiscal calendar change)

Forward-looking statements

Overview: Improved revenues and margins still leave SGI short of profitability in the first full quarter after the merger into Rackable. Numbers should be examined carefully.

Basic data (GAAP) :

Revenues were $100.1 million, up sequentially from $58.4 million and from $65.1 million in the year-earlier quarter. Comparisons are to Rackable Systems, pre-merger.

Net income was per share was negative $17.6 million, worse than the June 26 2009 quarter's negative $0.8 million or the September 27, 2008 quarter's negative $6.0 million.

EPS (earnings per share) was negative $0.59, down sequentially from negative $0.03 and from negative $0.20 year-earlier.


Not providing for fiscal 2010. Plan is still $500 million in revenue, with non-GAAP margins in 20s.

Conference Highlights:

GAAP and non-GAAP numbers varied widely, largely as a result of the merger of Rackable with SGI.

Non-GAAP numbers: revenue $122.7 million, gross profit $34.9 million, net income from continuing operations negative $2.8 million, continuing operations EPS negative $0.09. 28.4% operating margin. Based on 29.9 million shares. SOP 97-2 (software revenue recognition) accounting rule resulted in the $22.6 million difference with GAAP revenue, but then $10.0 million was included in cost of revenue and $12.1 million in operating costs. Other adjustments were amortization $1.4 million, inventory step up $1.4 million, stock based compensation $1.2 million, and restructuring $0.5 million.

22.3% GAAP gross margin, greatly improved due to mix of business and cost controls. Expects operating expenses to increase slightly going forward due to investment in expanded sales and research efforts.

Rational supporting the acquisition is already showing results.

Services accounted for 33% of revenue. International revenue was 31% of total. Storage 16%.

Cash and equivalents ended at $123.5 million. $16.0 million was burned in the quarter, but $9 million was used to increase inventory.

Most of the increase in revenue was from the acquisition of Silicon Graphics, Inc.

The company now has a broader base of customers with key verticals including cloud computing, defense, intelligence, financial services and manufacturing.

New products were introduced in the quarter. Altix 4700 set world records.

Corporate headquarters has be consolidated to Fremont, CA. Manufacturing is consolidated in Chippewa Falls, WI. The integration of Rackable Systems and Silicon Graphics is ahead of schedule.

One IceCube was delivered to a UK customer. Many new customer projects are underway, while Amazon was 23% of non-GAAP revenue and Microsoft continued to be a major customer.

Goal is for non-U.S. business to provide 50% of revenue. Looking to expand into Brazil, Russia, India and China.

Revenue by segment: 30% cloud and Internet computing. 25% defense and intelligence, 12% manufacturing, and 11% strategic research.

Long term goal is for professional and customer services to represent 50% of revenues.

Standardizing internal data management on a single Oracle system.

1355 employees at end of quarter.

Investing in market expansion for Octane III, CloudRack X2, and other products. $50 million R&D investment expected for 2010.


Opportunity for gross margin improvement? Revenue can be increased by recontacting installed base of customers. Professional services offerings should help over next 12 to 24 months. On gross margin, we still have room to cut costs.

Any indications the SGI sales force is able to sell Rackable products? The merger model was based on cost synergies. Naval Research Lab, an SGI customer, bought Rackable products. British Telecom bought an IceCube, which was based on SGI sales force.

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Copyright 2009 William P. Meyers