SGI Ramps Supercomputer Sales

November 24, 2010

SGI (Silicon Graphics International) reported calendar third quarter (Q3) results on November 3, 2010. Revenues were $112.9 million, up 12% sequentially from $101.6 million, and up 13% from $100.1 million in the year-earlier quarter. [Actually, these are fiscal Q1 2011 results, for the quarter ending September 24, 2010.]

GAAP 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.

That is modest revenue growth coming off a recession plagued 2009, and well short of hitting a profitable level. Things look better on a non-GAAP basis: 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." But probably not very positive, or they would have given us a number.

Is the new SGI, a combination of Rackable with the old bankrupt SGI, another loser company, unable to keep pace with competitors that can invest more in R&D and can reinvest profits? Maybe not. Maybe management is moving forward at a deliberate pace that really will get the company to break-even in 2011 and profits in 2012. Since the stock price makes the case for the loser scenario (market capitalization end of today was $241 million, about half annual revenues), here I'm going to look at the possible upside.

Q3 was the first full quarter of shipment for Altix UV, SGI's supercomputer offering, and 49 of these systems shipped in the quarter. Silicon Graphics International ships many products besides Altix UV, including racked server systems for datacenters and cloud computing. But I suspect most of the ramp from Q2 to Q3 was from Altix UV.

Service revenue was a healthy 30% of total revenues. Service revenue is usually a steadier stream than hardware revenues when you are selling in chunks as big as SGI does.

Most important of all, SGI reported they entered fiscal Q2 with a strong backlog. There were also large shipments late in the quarter, resulting in a larger accounts receivable than usual, at $96 million.

Altix UV sells mainly to government entities, including research laboratories and universities. But it also can be used for tasks like biotechnology and analysis of oil and gas exploration data. It gives a lot of computing power to these institutions at a very reasonable price. How much demand is out there for 2011, however, is difficult to predict. If the current quarter results come in strong, I would see that as an indicator that calendar 2011 will be a good year.

SGI says that margins on Altix UV are good, partly because of the software stacks that go with the hardware. Margins were a big concern both at the old Rackable and old SGI. I believe that prices on all products should be set to give healthy margins. If competition or lack of demand makes that impossible for particular products, then those product lines should be dropped.

So I'll hold onto my SGI stock and see what the results are for the current quarter. I'd actually like to see more spent on R&D, but only after the company is solidly in the black on a GAAP basis.

See also: Silicon Graphics International web site.
My SGI analyst conference call summaries page

William P. Meyers

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