Analyst Conference Call Summary

Silicon Graphics International

conference date: January 29, 2014 @ 2:00 PM Pacific Time
for quarter ending: December 27, 2013 (second quarter, Q2, fiscal 2014)

Forward-looking statements

Overview: Disastrous quarter attributed to turmoil from federal government shutdown, in line with preliminary announcement.

Basic data (GAAP) :

Revenues were $116.1 million, down 21% sequentially from $147.5 million and down 32% from $171.2 million.

Net income was negative $13.7 million, down sequentially from negative $6.8 million and down from $1.1 million in the year-earlier quarter.

EPS (earnings per share) were negative $0.40, down sequentially from negative $0.20 and down from $0.03 year-earlier.


For the second half of the fiscal year (ending in June) revenue is expected between $260 and $300 million.

The long-term operating model target is for non-GAAP gross margin of 31% to 33% and operating margin of 8% to 12%.

Conference Highlights:

"We are confident that our overall Federal business will soon resume its growth trajectory." Programs were put on hold because of the sequester and general budget uncertainty, but mainly just shifted out in time. Now that the budget is normalizing, we are seeing more activity, but some programs are still frozen. SGI is pursuing a number of large Department of Defense deals that are expected to be awarded this year. We expect are seeing significant RFP's from civilian agencies and government funded research programs.

Non-federal revenue in 2014 is expected to be up 40% vs. comparable periods in 2013.

Recent wins include in Japan for a coherent share memory UV system, and an ICE X in Europe.

Non-GAAP numbers: net income was negative $7 million, down sequentially from $1 million, and down from $3 million year-earlier. EPS was negative $0.20, down sequentially from $0.04 and down from $0.10 year-earlier. Gross margin 30.7%, up sequentially and y/y due to higher proportion of revenue from services and less legacy low-margin cloud server sales.

Federal government revenue dropped to $44 million from $76 million in the September quarter and $65 million year-earlier.

Products were 67% of revenue or $77.7 million.

Revenue by segment: Compute $60.6 million or 78% of total product revenue; Storage $17.1 million or 22% of product revenue; Service $38.3 million or 32% of revenue.

Legacy cloud business was $9 million. SGI continues to exit this business.

ICE X pipeline is strong with a November order from the UK Atomic Weapons Establishment for three ICE X systems. Believes can increase revenue 100% in 2014.

UV product line had a November order from the Institute of Statistical Mathematics in Japan. Believes will grow 30% in non-Federal deals in 2014.

Big Data work at Paypal and the U.S. Postal Service show the potential of this area.

Storage business has a growth trajectory.

49% of total revenue came from the public sector, 51% from commercial. 48% of revenue came from outside the U.S. 79% was from direct sales, 21% from partners. One greater than 10% customer.

Cash and equivalents balance ended at $118 million, down $47 million sequentially. There is no debt. Cash was used to increase inventory and to acquire Filetech. $5 million in capital expenditures. $5 million for depreciation and amortization. $4.7 million was used to repurchase stock; $19 million more is authorized for 2014.

Cost of revenue was $82.6 million, leaving gross profit of $33.5 million. Operating expenses of $48.4 million included: $14.9 million for research and development; $18.8 million sales and marketing; $14.5 million general and administrative; $0.1 million restructuring costs. Leaving income from operations of negative $14.9 million. Other income was $1.7 million. Income tax benefit of $0.4 million.

After the quarter ended a new enterprise storage system with flash arrays for Big Data and HPC workloads was launched, within the InfiniteStorage 5000 series. An alliance with SAP for an in-memory appliance was announced.

Expects non-GAAP operating expenses to normalize at $43 to $44 million per quarter.


Are you assuming for the second half of the fiscal year there will be no (federal) intelligence agency revenues? There are some, but not from the one agency we have discussed.

That intelligence agency, is that product no longer in the pipeline? We believe they will come back as a customer, but there is no specificity as to whether it would be the same or different projects.

Level of federal run rate per quarter? No specifics, but roughly where we were in fiscal 2014.

Margins down in second half? Yes, as the services become less of the mix and other specifics like the Jabil transition. In the near term Jabil will not be positive, but later it should be.

Intelligence agency that is frozen, that was not related to the government shutdown? Yes.

Cash direction near term? We are modeling that Q3 will be the trough as we build inventory.

We are starting to see regional improvements in Europe and Japan that could add to growth this year.

New SAP appliance competitive landscape? We can go from the entry level to the high end just by adding more boxes, which should give us an advantage.

We do think there may be some upside, particularly in life sciences, because of the IBM sale of its server division to Lenovo, a Chinese company.

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Copyright 2014 William P. Meyers