Analyst Conference Summary

Silicon Graphics International

conference date: February 2, 2010 @ 2:00 PM Pacific Time
for quarter ending: December 25, 2009 (2nd fiscal quarter 2010)

Forward-looking statements

Overview: GAAP numbers bad, non-GAAP numbers good. Careful attention to differences is required to evaluate this stock.

Basic data (GAAP) :

Revenues were $94.1 million, down 6% sequentially from $100.1 million but up $38.8 million year-earlier. Note now reports non-GAAP revenue as well, and y/y comparison is to Rackable Systems.

Net income was negative $23.0 million, down sequentially from negative $17.6 million and down from negative $19.5 million year-earlier.

EPS (earnings per share) was negative $0.77, down sequentially from negative $0.59, and also down from negative $0.66 year-earlier.


Fiscal 2010 internal plan is for $500 million in non-GAAP revenue with non-GAAP gross margin in the "mid to high twenties."

Calendar Q1 is typically the seasonal low quarter in this business.

Conference Highlights:

The quarter was characterized by a large number of customer successes and strong performance in a variety of key verticals. Government and Defense contributed over 40% of revenue. Customer base is now much more diverse than one year ago. Product capabilities are unparalled.

Non-GAAP revenue was a record $151.5 million, up 23% sequentially from $122.7 million. Non-GAAP revenue was not reported year-earlier. There are GAAP v. non-GAAP revenue differences because of accounting for software, service and maintenance bundled with hardware partly into deferred revenue. Deferred revenue ended at $67.3 million. 28.7% gross margin (19.8% GAAP).

Non-GAAP income from continuing operations was $2.4 million. Non-GAAP net income $5.6 million. EPS $0.18 per share.

Cash and equivalents ended at $154.8 million, up over $30 million in the quarter. Inventories dropped over $40 million to $85.4 million, due to accounting change. Accounts receivable up, accounts payable down.

Services revenue was 27% of non-GAAP revenue; international revenue was 29%. Storage products were 16% of revenue.

GAAP cost of revenue was $75.5 million. Leaving operating profit of $18.7 million. Operating expense of $44.9 million consisted of: Research and Development $13.1 million, sales and marketing $18.1 million, general and administrative $13.0 million, restructuring $1.7 million, and an acquisition-related reversal of $1.0 million. Leaving a loss from operations of $26.3 million. Other income was negative $1.4 million. Income tax benefit was $4.5 million.

Server business transitions are favoring SGI. Product road map is strong. Seeks increased storage attach rates for servers, looking for 30% of revenue eventually. Services are strategic and a significant business opportunity. There was only one greater-than-10% customer in the quarter.

The old SGI and Rackable Systems are now working as a single company. Operating expense was around $30 million less than year-earlier for the separate companies combined.

1312 headcount at end of quarter. Employees are excited by results and new products.


Why low full year guidance number? We are ahead of the pace in Q1 and Q2. Normal seasonality is down for our Q3 and Q4, especially for government funds.

Amazon was the 10% plus customer? Will be in 10Q on file tomorrow.

Vertical lumpiness going forward? We don't have projections for verticals. As stimilus dollars flow energy and education will become more important for us. Telecommunications is a new growth sector for us.

Pricing environment? Strong gross margin was due to the mix of products and services. Servers are around 30%, much within industries where we can get a premium. "I am feeling more and more confident about our competitiveness." A tough economy does equate to more pricing discussions.

Deferred revenue spike cause? Service and maintenance cash payments have to be deferred.

We are looking to significantly grow our professional services revenue.

R&D spending will be larger in the second half of the fiscal year than the first half. Full year expense around $50 million.

Altix UV will be able to address new markets with large single instance memory and greater input abilities as well as fastest computing.

In next fiscal year we will change our revenue recognition accounting practices that should narrow the non-GAAP and GAAP revenues.

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Copyright 2009 William P. Meyers