Analyst Conference Call Summary

Silicon Graphics International

conference date: November 6, 2012 @ 2:00 PM Pacific Time
for quarter ending: September 28, 2012 (first quarter, Q1, fiscal 2013)

Forward-looking statements

Overview: Improved sequentially, but still short of profitability.

Basic data (GAAP) :

Revenues were $192.9 million, up 7% sequentially from $179.5 million and up 8% from $178.9 million in the year-earlier quarter.

Net income was negative $8.7 million, improved sequentially from negative $18.4 million, but worse than the year-earlier negative $2.7 million.

EPS (earnings per share) were negative $0.27, up sequentially from negative $0.58, but worse than the year-earlier negative $0.08.


For fiscal Q2 ending December 28, 2012, revenue is estimated between $180 and $195 million, with GAAP EPS negative $0.22 to negative $0.14 and non-GAAP EPS (which excludes restructuring charges, etc.) between zero and $0.08 per share.

Conference Highlights:

Solid sales in quarter. Operating expenses were lowered sequentially. Macroeconomic environment is still challenging. Still on track for non-GAAP profitability for the full fiscal year.

Non-GAAP numbers: net income negative $3 million, EPS negative $0.10. Excludes $5 million of adjustments from GAAP. 22.4% gross margin. EBITDA near break-even.

Had a number of low-margin deals generating income in the quarter, worth about $15 million, resulting in overall reduced margins. 7 of the 9 low margin deals have been worked through. The two remaining low-margin deals will total around $50 million, most of which will be recognized in fiscal Q3. New deals have better margins.

Public sector 51% of total revenue, Cloud 23%. Domestic 62%, international 38% of revenue. One greater than 10% customer in the quarter.

Cash and equivalents ended at $111 million. Inventories were $145.7 million, up $22 million sequentially. $10.3 million was owed on the credit facility. $1 million capital expenditure, $3 million depreciation.

In the quarter SGI launched DataRaptor, the MarkLogic Database, and InfiniteStorage 17000.

3/4 of revenues come from targeted market segments, or verticals. Working to extend market share in these verticals. $100 million of deals were booked in key verticals in Q1.

Cost of revenue was $150.7 million, leaving gross profit of $42.2 million. Operating expenses of $49.2 million included: $14.0 million for research and development; $19.6 million for sales and marketing; $14.2 million for general and administrative; and $1.5 million for restructuring. Operating income was negative $7.0 million. Other expense was $1.3 million. Income taxes $0.4 million.

Is worried about fiscal cliff effects on government spending.


UV2 rollout? We introduced UV2 less than 6 months ago. Uptake has been slower than UV1, but demand had built up for UV1. Interest in UV2 is increasing.

Low margin deals? The deals in Q1 had positive but low gross margins. The deals in Q2 have negative gross margins. The ones for Q3 have low but positive gross margins. There are going to be no more low-margin deals.

Fiscal cliff impact in Q2? No, the lower revenue is due to large deals that we now believe won't be recognized until the March quarter (Q3).

You know as much as we do about the likelihood of the fiscal cliff. We are paying attention to it, but for now believe it will be fixed, as the President said. We have little business in the federal areas that would be most impacted.

Patent portfolio update? Completed inventorying of our IP. We are having the valuation done by a top firm. We may have data by the end of year. Then we have to decide what to do with it. We are also adding to our IP portfolio regularly.

MarkLogic? It is an affiity partnership in the Big Data space. We are pursuing other types of partnerships as we move from selling just hardware to selling fully integrated solutions.

We are working with contract manufacturers to reduce cost, but will have a hybrid strategy.

Services team is now more closely integrated with hardware sales team. Service is now about 25% of our business, which is a margin-expansion opportunity.

Are you saying that the March quarter low-margin deals will mean revenues will be higher that in the December quarter? That is the way we are looking at it, but we are not attempting to guide Q3 right now.

We are doing the best we can to accelerate headcount reductions in Europe. France and Germany, their governments are making it difficult.

Can you achieve a high-single digit operating margin in fiscal 2014? Yes.

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Copyright 2012 William P. Meyers