SGI swings to a gain despite $50m in 'LMDs of profit destruction'

Time for Nvidia or Cisco to buy the NUMAlink interconnect

Supercomputer and cloud server maker Silicon Graphics ran a dog and pony show last week on Wall Street at the Needham Growth Conference, and because it was going to talk about its business the company had to release preliminary financial results for its second quarter of fiscal 2013 to avoid being busted for selective disclosure.

In the quarter ended in December, SGI is projecting that its sales were worse than expected, which is the bad news, but added that the company will either break even or turn a small profit, which is a lot better than a big net loss it was projecting.

Specifically, SGI said in a statement that it expected for its sales in the second fiscal quarter to come in between $US170m to $172m, which is considerably lower than the $180m to $195m that it had been projecting. The revenue miss was attributed to US government orders being pushed out into the third fiscal quarter, in many cases because of the then-looming Fiscal Cliff. The US government didn't go over the Fiscal Cliff, but Congress and the White House are arguing over who should take the wheel and government spending is scraping the guard rails and making some sparks. It is not clear if Dead Man's Curve is up ahead or not, mainly because of fog.

In other words, SGI, which relies highly on deals from Uncle Sam, probably doesn't have as much visibility into the next few quarters as it would like, just like any high tech company with a dependence on the US federal government for a chunk of their change.

That said, SGI took a stab at it and is projecting that it will post revenues for the third and fourth quarters of fiscal 2013 to the sum of between $400m to $420m, which includes around $50m in low-margin deals that got Jorge Titinger, the company's president and CEO, his job last year. SGI said back in November 2012 when it was reporting its Q2 financials that it had $57m of the total of $87m in low-margin deals to book still and that it might not be able to get these on the books in the December quarter. It looks like most of the remaining LMD issue will be dealt with, and that the impact to gross margins and the bottom line is not as bad as expected.

On a GAAP-basis, which means including revenues on machines accepted by customers and the costs of those machines also booked, SGI said it will do anything from break even to run a profit of $1m in the December quarter, which works out to as high as 3 cents per share. Earlier guidance was for a net loss of between 14 and 22 cents per share. On a Non-GAAP basis, which includes deals in flight but for boxes that have shipped, net income is more like $3m to $4m and excludes around $7m in adjustments for stock-based compensation, amortization, restructuring, and severance charges and a $4m non-cash tax benefit.

"We are pleased to have achieved non-GAAP profitability and another strong cash performance in the second quarter, which is a reflection of our continuing improvements in deal quality, costs, and working capital management," Titinger said in the statement. "We are making good progress on our longer-term strategic vision to leverage SGI's strong technology in the areas of big data, storage, and scale-up computing. At the same time, we are mindful of the challenging near-term environment for IT spending among both government and commercial customers, particularly outside the U.S. We are therefore staying focused on previously discussed operational initiatives around cost reduction and supply chain management to help maintain our positive momentum."

SGI exited the December quarter with $128m in cash and equivalents, up from $111m in the prior quarter. And the company's board turned right around and authorized the burning of up to $15m (most of that cash increase) on a stock buyback program, which will of course be used to line the pockets of SGI executives in future quarters. SGI paid off $11m on its line of credit in the quarter.

Wall Street reacted positively to the news, with SGI's stock hitting $11.94 at the time El Reg's scribes penned this missive, up 18.6 per cent this week. The company's shares have been sawtoothing up and down and up again since hitting a low of $5.19 back in March 2012. The company has a market capitalization of $390m at the moment, not quite as high as the $689m of rival Cray but a lot closer than it was a year ago.

It would not be surprising at all to see SGI try to sell off its NUMAlink system interconnect business and merge with Cray to try to get an HPC and hyperscale cloud server powerhouse together and to smooth out the revenues of the two companies. The question is this: Who would want to buy the NUMAlink intellectual property. Nvidia, which has aspirations in servers and HPC clusters based on hybrid ARM-GPU computing elements, needs an interconnect. And buying one is far cheaper than starting from scratch, as Intel's acquisitions of Ethernet and InfiniBand switching and the Cray "Aries" interconnect demonstrate. Being a global shared memory interconnect, NUMAlink could be particularly interesting for Nvidia to get its hands on. Lenovo or Inspur, two Chinese server makers that are growing like crazy, could be interested, and even server upstart Cisco Systems could find some use for it. All that SGI would need to do is keep the rights to use the technology, just as Cray did with Aries. ®

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