Analyst Conference Call Summary

Silicon Graphics International

conference date: November 3, 2010 @ 2:00 PM Pacific Time
for quarter ending: September 24, 2010 (first fiscal quarter 2011)

Forward-looking statements

Overview: Good sequential improvement in revenue and gross margins, but still not in the black.

Basic data (GAAP) :

Revenues were $112.9 million, up 12% sequentially from $101.6 million, and up 13% from $100.1 million in the year-earlier quarter.

Net income was negative $11.2 million, up sequentially from negative $27.6 million and up from negative $17.6 million year-earlier.

EPS (earnings per share) was negative $0.37, improving sequentially from negative $0.91 and from negative $0.60 year-earlier.


Reaffirmed fiscal 2011 non-GAAP guidance: revenue between $550 and $575 million; gross margin 27% to 30%; operating expenses $165 to $171 million; EPS break-even.

Conference Highlights:

Non-GAAP revenue was $130.3 million, up 6% y/y from $122.7 million. Net income negative $1.8 million. Non-GAAP EPS was negative $0.06, improved from negative $0.09 year-earlier. EBIDTA characterized as "positive." Gross margin 28.3%, greatly improved largely because of Altix UV creating a better mix.

$1.6 million favorable impact from foreign exchange in the quarter.

Performance was strong in the government and Internet cloud industries. Altix UV shipped to 49 customers in the quarter. COPAN 400T first shipments made to financial services, telecommunications, and U.S. government.

Entering fiscal Q2 with a strong backlog. There were also large shipments late in the quarter, resulting in a larger accounts receivable.

LSI channel partnership generated revenue in the quarter.

Public sector and cloud contributed 75% of revenue. Manufacturing, oil and gas, and telecommunication sectors were also strong. U.S. government was a greater than 10% customer. Amazon was a greater than 10% customer. Service was 30% of business. 18% of revenue was from storage. Rackable product line did well across the major industries.

U.S. business was 74% of revenue; international 26%. Channel business generated 28% of revenue.

Cash and equivalents ended at $98.9 million, down $41.9 million sequentially. But $32.3 million of the cash "was used to fund customer orders." Accounts receivable ended at $96.3 million, inventories at $105.4 million, accounts payable $48.0 million, deferred revenue at $152.8 million. Lost $1.2 million on auction rate utilities. Repurchased $1.3 million in shares.

Starting with this fiscal Q1 2011 quarter, new revenue recognition rules were adopted, resulting in no change in non-GAAP results, but a gain of $12.3 million in GAAP revenue and 210 basis point of gross margin.

Cost of revenue was $81.9 million leaving gross profit of $31.0 million. Operating expenses of $42.1 million included $13.8 million for research and development, $14.9 million for sales and marketing, and $12.8 million for general and administrative. Operating loss was $11.1 million. Other income $0.5 million. Income tax $0.6 million.

For fiscal 2012 and 2013, the internal plan is to grow revenue at 5% to 10% per year while expanding gross margin by 1% (100 basis points) per year.

Margin expansion in the future is based on higher margin products, a higher percentage of service revenue, and operational efficiency.

1305 employees, including temps, at the end of the quarter.


UV platform gross margin? Compared to Itanium generation, we can support more standard operating systems and tools. Margins on UV are better mainly from the larger software stack sold with it. UV is one of our highest margin products.

Are cloud and Internet verticals the same for you? Yes.

Market opportunity for upgrades to UV? No numbers, but we are contacting every previous generation, Altix 4700 Itanium customer to sell UV. But UV also has a broader set of applications, including Oracle and other software applications. These high-end systems tend to have a long life.

Storage? Did it increase 26% sequentially? Driven by LSI relationship and first full quarter of COPAN.

Last year December quarter was strongest. This year? We expect second half of fiscal 2011 to be stronger than second half of fiscal 2010. A variety of factors affect seasonality, now that we have so much federal work we also see ties to that fiscal year. But calendar Q4 still tends to be the strongest quarter.

Historically we only supported a couple of databases including MySQL; we think supporting more databases like Oracle will help us sell more UV units.

Will continue to repurchase shares when the stock appears to be undervalued.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2010 William P. Meyers