Analyst Conference Call Summary

Silicon Graphics International

conference date: August 18, 2011 @ 2:00 PM Pacific Time
for quarter ending: June 24, 2011 (fourth fiscal quarter 2011)

Forward-looking statements

Overview: Great quarter.

Basic data (GAAP) :

Revenues were $195.5 million, up 36% sequentially from $143.7 million and up 92% from $101.6 million year-earlier.

Net income was negative $12.1 million, down sequentially from negative $1.7 million, but up from negative $27.7 million year-earlier.

EPS (earnings per share) were negative $0.39, down sequentially from negative $0.05, but up from negative $0.91 year-earlier.


For full fiscal 2012 GAAP revenue is expected between $740 and $780 million, up to 24% over fiscal 2011, with GAAP gross margin between 28% and 30% resulting in GAAP EPS of $0.15 to $0.30. Non-GAAP EPS expected between $0.60 and $0.80.

Conference Highlights:

For both Q4 and fiscal year 2011, the revenue was a record. Met or exceeded fiscal 2011 guidance. SGI is growing faster than the industry and is now profitable on a non-GAAP basis. Technical computing products by SGI are in demand.

There was strong business momentum in the Public, Manufacturing, and Cloud sectors. Despite macro concerns U.S. federal and Japan businesses were strong. Japanese government is investing in key science and industries. Believes revenues will grow both in Japan and in U.S. federal in fiscal 2012.

Products in technical computing help design products, so they sell based on speed and scale. We aim to be the trusted integrator across the technical computing stack. Intends to re-enter the high end of the cluster market, competing against Cray and IBM.

OpenCFD, a leader in Computational Fluid Dynamics with over 100 customers, was acquired on August 8. Introduced InfiniteStorage (IS) 5500. Upgraded Altix ICE and Altix UV lines. More than 500 Altix UV systems have shipped since its launch in June 2010.

Services contributed 27% of revenue. International business was 47% of revenue. There was just one >10% customer, Amazon. Storage was 18% of revenues, 82% was compute.

Non-GAAP numbers: revenue was $189.8 million, up sequentially from $135.8 million and up from $122.2 million year-earlier. Gross margin was 28.4%. Net income $3.9 million. EPS $0.12.

Percent of total revenue by segment: public sector 53%, cloud 16%, manufacturing 17%, telecom 3%, other 11%.

GAAP cost of reenue was $149.5 million, leaving gross profit of $46.0 million. Operating expenses of $59.0 million included: R&D $13.6 million; sales and marketing $26.2 million; general and administrative $15.6 million; restructuring $3.4 million; acquisition $0.2 million. Loss from operations was $13.0 million. Other income was $0.1 million. Income tax benefit was $0.9 million.

Cash and equivalents balance ended at $143.2 million, up $9.4 million sequentially. Inventories declined to $81.0 million. Became debt free after retiring $9.6 million debt from SGI Japan acquisition.

NOLs (net offsetting losses, for tax purposes) ended at $465.7 million. That means the tax rate will be minimal "well into the future."

SGI analyst day will be September 22.

Expects to grow sales force by 10% in fiscal 2012.

Key differentiator from old Silicon Graphics is focus on profitability, even while growing.


Reason for move to GAAP guidance? The difference between GAAP and non-GAAP revenue is becoming minimal.

Room for more margin leverage? For SG&A we incurred some end of year cost, like commissions on high sales.

OpenCFD just came to market with their latest software, OpenFOAM. We had many joint customers.

Patent porfolio value? Shared memory and scale-out compute are strong parts of our patent portolio.

How are you expanding in federal space when NetApp and others are contracting? We are in specific sectors like universities and defense. We have no exposure to state and local budgets. We have key new opportunities in high end HPC for civilian agencies. Our products are differentiated to match to mission requirements.

September quarter, directionality? We don't see customer hesitation today in our pipeline. Across geographies and verticals we are not seeing a hesitation right now. Customers want to deploy more technical computing because that lowers the cost of their overall design cycle. Quarters can swing for us because we have large deals and revenue based on acceptances, plus the usual seasonality.

It is reasonable to say that if we go down sequentially in the September quarter, it would be a modest drop.

What factors drove the revenue upside? Continued UV strength. We are competing better in larger Infiniband cluster offerings. Our fiscal 2012 growth projections are based on continued strength in those areas.

High end of HPC market? Altix ICE will be fifth generation for mid-market cluster. About a year and one-half ago we decided to get to largest of clusters in market. That would be a billion per year market opportunity, previously dominated by Cray and IBM. We are hoping to catch transitions from Itanium based systems to newer Intel based processors.

Microsoft SQL Server version 11.0, codename Denali, will scale considerably on the new SGI systems.

SGI Japan? Exceded expectations. About $46 million revenue in Q4.

Long term operating margin is still 8% to 12%. We will talk more about our long term model on analyst day.

Our new systems will have roughly equivalent performance as Oracle Exadata systems at about one-third the price.

Rackable business gross margin in quarter? We saw no anomalous in Rackable margins this quarter.

We are looking at fiscal 2012 as an investment year, somewhat front end loaded. But we plan to balance investment, growth, and EPS improvement.

In fiscal 2012 we expect to see a stronger percentage of revenues from services.

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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 2011 William P. Meyers