SGI not selling off NUMAlink – so forget that idea

Swings to a profit in the December quarter on UV, ICE X sales

Thanks to belt-tightening and the shifting of $50m low-margin deals out another quarter, supercomputer and dense rack server maker Silicon Graphics turned in a relatively decent second quarter of its fiscal year 2013.

Two weeks ago, when it was participating in the Needham Growth Conference, SGI released preliminary financial results for Q4 so it would not get busted for selective disclosure by the US Securities and Exchange Commission. SGI reported its final results for the second quarter of fiscal 2013, ended in December, after the markets closed on Wednesday.

The company provided some insight into how its business was doing, and on Thursday the company's shares rose by 13.3 per cent to $14.54 a pop. This is a big jump for SGI, kissing a 52-week high and giving it a market capitalization of $425m as El Reg goes to press.

In its second fiscal quarter, SGI booked $171.2m in revenues – a little better than its guidance a few weeks ago. Product sales actually fell 9.9 per cent to just under $129m, while services revenues were off 4.2 per cent to $49.9m.

In the product category, systems accounted for $150.7m in products sales while storage arrays accounted for $20.5m. SGI had one customer who accounted for more than 10 per cent of sales, and in most quarters when that happens, it has traditionally been online retail giant Amazon.

Thanks to a $3.9m tax abatement and the aforementioned cost-cutting, SGI swung to a small profit of $1.1m compared to a loss of $2.3m on $195.2m in revenues in its same quarter last year.

For the first half, SGI had $364.1m in sales, off 2.7 per cent compared to fiscal 2012, but thanks to several bad deals – which El Reg has been calling LMDs of profit destruction (short for low-margin deals) and other issues – SGI's losses widened by 54.3 per cent over the six months to $7.6m.

So why are SGI shares on the rise?

Well, for one thing, the company generated enough cash to pay off its line of credit and has $128m in the bank and no debts, explained SGI CEO Jorge Titinger in a conference call going over the numbers. Another reason for optimism is that $30m in deals with the US government that were frozen in the fourth quarter have thawed and have been booked in the first quarter.

Titinger also said that the UV 2000 Xeon-based shared-memory supercomputer, which was announced last June, was starting to get some traction, with its sales pipeline up 29 per cent in the quarter and the company enjoying "a nice improvement" in sequential sales from fiscal Q1 ended in September. SGI sold two high-end UV 2000 shared memory systems to the US government in the December quarter, with a total of 1,024 cores and 4TB of memory. The company also sold some big UV boxes in Latin America and Asia.

The pipeline for its ICE X hyper-dense Xeon E5 servers, which were previewed many months before Intel got the Xeon E5 chips to market, was also up 16 per cent in the quarter. A double-dense version of the machine named Gemini started shipping to customers during the December quarter.

SGI is also going through its patent and other intellectual property and trying to figure out what it is worth, what it can stop investing in, and what it might sell for cash. And if, as El Reg has pondered, you might think that SGI might sell off the NUMAlink interconnect that makes those shared memory UV 2000 machines possible, Titinger put the kibosh on that idea.

"This evaluation process has also confirmed the strength of the NUMAlink IP in particular," explained Titinger. "This is our core asset and a critical part of our strategic plan in terms of both growth and margin expansion. We therefore currently plan to retain and invest in the NUMAlink IP, as we believe this is the path that best maximizes its value."

This stands in stark contrast to Cray, which sold off its interconnect business to Intel. The difference is that Cray has retained the rights to use the Gemini and Aries interconnects that Intel now controls. Someone probably could use that NUMAlink interconnect, so maybe instead of selling it, SGI could license it.

We'll see what happens.

If SGI gets those LMDs off its books in the third quarter of fiscal 2013 ending in March, as expected, and revenues and profits perk up, then there is no reason for SGI to sell or license NUMAlink. But if the US government cuts way back on spending, and Intel and Cray start hammering on customers with Aries interconnects and downplaying the value of shared memory, SGI may have no choice. We still think that Nvidia and Cisco Systems could find a lot of use for NUMAlink.

SGI reiterated its prior guidance for the second half of fiscal 2013, which ends in June of this year, saying it expected $400m to $420m in revenues. The company added that it expects revenue in the third quarter alone to be in the range of $200m to $230m, and this is where the $50m in LMDs would hit. So at the midpoint of guidance for the second half of the fiscal year, SGI is telling Wall Street it will rake in $771m or so in fiscal 2013. ®


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