Analyst Conference Call Summary

Silicon Graphics International

conference date: November 8, 2011 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2011 (first quarter, Q1, fiscal 2012)

Forward-looking statements

Overview: Record revenue for a Q1, but down sequentially from Q4. Non-GAAP profitable.

Basic data (GAAP) :

Revenues were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter.

Net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier.

EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.


Reiterated fiscal 2012 guidance: Revenue $740 to $780 million, gross margin 38% to 30%, GAAP EPS $0.15 to $0.30, non-GAAP EPS $0.60 to $0.80.

Conference Highlights:

Non-GAAP numbers: net income $2.2 million, down sequentially from $3.9 million but up from negative $1.8 million year-earlier; EPS $0.07.

Over 100 new customers were added in the quarter, including key Life Sciences wins. U.S. Federal, Japanese and American commercial segments all performed well. Had only 1 >10% customer,

Believes the overall market for technical computing continues to expand and the market for UV in particular is expanding. Barriers to entering this market are high.

$248 million backlog continues to grow, as does pipeline. "Our strategy is working."

Life Sciences customers included Bayer BioScience, BIOGEMMA, Kyoto University and St. Jude Children's Hospital.

Improved Hadoop presence with a partnership with Cloudera. Getting ready to expand Rackable product line.

"Filed SEC Form S-3 universal shelf registration statement to raise up to $100 million to pursue acquisitions." However, has no immediate plant to sell stock or issue debt. Also intends to secure a $50 million asset-backed credit facility.

Channel sales was 10% of total. International sales were 41% of total. Japan contributed $33 million and acquisition there has done very well; selling more SGI product. Also is expanding the international sales force.

Products represented 72% of revenue, services 28%.

Strongest vertical markets: public sector, cloud, manufacturing. By percent of total revenue, manufacturing 16%, cloud 25%, public sector 44%, others 15%.

Of product revenue, compute was 86% storage was 14%.

GAAP gross margin was 29.4%, up sequentially from 23.5% and from 27.5% year-earlier.

Cash and equivalents ended at $115.5 million, down sequentially from $143.2 million to increase inventory for increased business. Inventories climbed almost $30 million sequentially to $110.7 million. Expects to continue to use cash to build orders in backlog.

Cost of goods sold was $126.3 million, leaving gross profit of $52.6 million. Operating expense total of $55.0 million included: $16.2 million for research and development, $21.8 million for sales and marketing, $16.9 million for general and administrative, and $0.1 million for restructuring. Net interest income was negative $0.1 million, other expense was $0.9 million. Income tax benefit was $0.7 million. Share based compensation included was $2.1 million.

Does have concerns about hard drive supply and prices in the coming months, but has multiple drive suppliers.

The next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.


Shelf registration & credit facility acquisition criteria? We will be transparent with investors. The registration has a 3 year life. We have demonstrated over the past 2 years that we are value buyers.

Intel Romley architecture, when can you recognize revenue? Expect Romley revenues in calendar Q1. The NASA Romley win and others will be shipped and recognized next quarter. Romley costs so far are R&D costs. We are shipping sample Romley systems already; next quarter we should be in full production.

Sequential revenue decline in Japan? Japan did just $4 million when it was SGI Japan a year ago. Sequential decline was typical of start of a fiscal year.

Drive supply effect on margins? We are a tier-1 OEM, we have already secured additional inventory, and where prices are increasing we are passing them on to customers. We believe our guidance for margin will not be affected.

Software plans? We are focused on supplying better management software and performance tools for our platforms. The application space is also important to us. We are looking strategically at expanding our application offerings. Software expansion will help with our margins and earnings.

The inventory buildup in the quarter will come back in cash in future quarters. It had to do with two $20 million deals booked; we don't build until we have orders. So far it is not due to Romley introductions.

Do you expect weakness in calendar Q1 from budget cutbacks for the new year? No, we have visibility through our fiscal Q2; business is growing, backlog is growing, and the pipeline is growing. No federal mission is immune to budget cuts, but in our segments the desire for better technical computing is mission critical.

Storage outlook? We did a little lighter than we like in the quarter. We would like to see it represent 20% to 25% of product revenue. We will be making new device announcements soon. Our advantage is tightly integrating to a high-density computer server.

We are competing very effectively against HP. They are our number 1 competitor in the space.

Backlog means we have business under firm contract to deliver.

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Copyright 2011 William P. Meyers