Robert Ewald – Chief Executive Officer
Kathy Lanterman – Chief Financial Officer
Doug Britt – Senior Vice President of Sales
Silicon Graphics (SGIC) Q1 2009 Earnings Call November 4, 2008 5:00 PM ET
I would like to welcome everyone to the Silicon Graphics first quarter fiscal year 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Miss Marla Robinson.
Thank you for participating in this call. With me today are Bo Ewald, our Chief Executive Officer, Doug Britt, our Senior Vice President of Sales and Kathy Lanterman, our Chief Financial Officer.
The call is intended to elaborate on news released earlier today to report our financial results for the first quarter fiscal 2009 which ended on September 26, 2008. Before we begin, I'd like to remind you that the matters we are about to discuss other than historical financial data are forward-looking statements and are subjects to the risks and uncertainties described in our earnings release, our Form 10-K for the year ended June 27, 2008.
The information provided on this call is as of September 26, 2008 and we do not undertake to update this information during the quarter. Actual results may vary. During the course of this conference call, we will describe certain non-GAAP and pro forma financial measures in an effort to provide additional information to investors. These should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to the investor relations section on our website at SGI.com/investors for the most directly comparable GAAP financial measures and the related reconciliation.
This conference call is open to the public and is being webcast. An audio recording of the call will be available through November 11, 2008 on our web site and as an archived web cast after November 11, 2008. During this call we will refer to a presentation that is posted at SGI.com/investorrelations. Please take a moment to open that file now. When you open the presentation, please turn to the second slide and take a moment to review the legal disclaimers.
At the conclusion of our prepared remarks, we'll have a Q&A. With that introduction, I'll turn the call over to Bo.
We're on the Third Slide now which is entitled 'Topics" and will follow the usual style that we have and that is, I'll first say a couple of things, and then Kathy will go through the results from our first quarter. Doug Britt will update you on sales activities and some specific customer activities, and I'll come back and talk about a few things going on in the company.
If you turn to Slide 4 entitled "Business Highlights", there were just some of the things that were going on during the quarter in way of quick highlights. We had several key wins during the quarter. Doug will talk about some, but in addition to those at NASA Ames Research Center out here in California, we've installed the next phase of what will be NASA's largest computer and we'll just say stay tuned for other news on that with the Super Computing Conference coming up.
Also, you'll remember that for the last year or so we've been talking about hybrid computing where with the different types of systems that we have and our storage, we have the ability to provide solutions for customers with which they can use our different systems to solve different types of problems. During the quarter, we had a big order from Ford again with multiple types of our systems going to Ford Motor Company.
Also, you'll remember that we've talked in previous strategic briefings about our large shared memory systems being able to be used for very large data analysis problems, and although we won't reveal these, we in fact had some wins from classified customers during the quarter with our shared memory systems for these large data analysis problems.
Also our computers not only are fast, but they enable swimmers to swim quickly and you know during the Olympics that many swimmers from many countries shattered many records and many of them, most of them in fact, were wearing the Speedo Fast Skin swimwear. I just wanted to point out that was in fact designed in part on our systems at Speedo's Aqualab R&D facility.
Big data is another part of the triad of our strategy and we've taken another very positive step there with Oracle. Our systems have been validated by Oracle. Our adaptive data warehouse has been validated by Oracle at up to five terabytes, a very positive step for us in being able to solve these very large data problems that come up.
And as you know, saving money, saving energy, consolidation, those sorts of things are going to become even more important as we move forward in this more uncertain time and we have just received a new certification that all of our Blade servers that we're using are 80 plus certified, the power supplies are, meaning they're very energy efficient and that would point you to the information that you'll see about that as well as what we're doing on the climate savers initiative where our ice line and the Altix line both meet the 2009 and in some cases, the 2010 climate savers requirement.
So in fact, you will see and hear as we move forward more from us about how our systems can be used to help our customers in these more uncertain and turbulent times to save money on the energy side, be more efficient and go through various consolidations that we're sure they'll be going through.
Also, we put out a press release about this previously. I wanted again to highlight Barb Stinett joined us in July to lead and grow the Worldwide Service and Solutions Business and she's up and running and we'll fill you in on that as we go along in future sessions.
With that, we'll turn it over to Kathy, and we'll go through the results.
I'd like to refer all of you to Slide 6 of the presentation. In the first quarter of 2009, among other things we performed within the ranges that we provided back in Q4 for both bookings and revenue. We were able to revenue results at the high end of the range and did that largely through the delivery of the first significant milestone in a multi-year contract that Bo talked about to supply NASA Ames with it' next major super computer.
We achieved stability in the revenue line as compared to the prior quarter and the first quarter of the prior year across all products and services. We continued an inflection in our service business with revenue in the quarter and the past two quarters, reversing the sequential downward trends that we had been experiencing for many years.
We saw gross margin results trend down in the quarter driven by the planned mix shift to lower margin cluster server products. And then importantly, we decreased our operating expenses over the prior quarter and that was as a result of our tightened expense management aimed at lowering our operating break even point during fiscal 2009.
If I can ask you to slide down to Slide 7, that slide shows you both the GAAP and the non-GAAP summary results, and I'm going to go into a bit more detail on some of the major line items.
First, as a reminder, we define bookings, also referred to as orders as authorized purchase commitments for our products and professional service accepted in the quarter that are expected to ship within the next 12 months and back log is the cumulative bookings for which we have not yet recognized revenue.
I'll point you to the back log on chart and point out that as of September 26, the pro forma back log was $125 million which is down from $147 million at the end of June but up significantly, up actually 92% year over year from the $65 million that we did at the end of September 2007. Those deals are over $5 million, comprised about $55 million or 44% of our end of quarter back log and of that about $32 million is related to multi-year deals which means that are expected to convert to revenue outside of our fiscal year.
Sliding down to bookings, really big picture. Before I talk specifically about bookings, from a big picture standpoint we really saw no major shift in our customer buying patterns stemming from the current economic crisis, although we do continue to carefully evaluate for any impact on SGI.
Our bookings were decreased in Q1 2009 compared to the comparable period, but we really attribute that delay in closing on several potential deals that really were timing issues as opposed to fundamental changes in buying patterns.
On the revenue line, we delivered $118 million in pro forma revenue, reflecting stability on the revenue line both sequentially and year over year.
Slipping down to margins, on a pro forma basis, our product standard margins in Q1 2009 decreased over the prior quarter driven by product mix and they were in line with expectations. The difference between our product standard margins and our product gross profit margins are other cost of goods sold which include the cost of our manufacturing organization, variances and warranties.
Our product gross margins in the quarter decreased 10% compared to the prior quarter and were down to 23.8% and that was a slight decrease compared to the year ago period.
The margins for our services business decreased 3% relative to the prior quarter and 10% compared to the year ago period. The declines were significantly impacted by a large low margin transaction. The prior year declines were primarily due to year over year decreases in our customer support revenue. Overall, our pro forma gross margin for the quarter was 30.1%.
Now I'll run through our GAAP results for the quarter and a more comprehensive review of the pro forma numbers will follow. On a GAAP basis for Q1 2009 revenue was $92.8 million at a margin of 31.5%. Our operating expenses were $55.8 million and that included a restructuring charge of $3.8 million from those cost reduction actions I spoke about earlier and that yielded an operating loss of $26.5 million and a net loss of $33.7 million.
As of September 26, 2008 unrestricted cash, cash equivalents and marketable investments were $36 million down slightly compared to the prior quarter. The maximum amount drawn on our revolving line of credit and subsequently repaid within seven days was $20 million. The drawing down of that full $20 million during the first quarter was not for operational purposes but was in response to the uncertainty in the overall credit markets at that time.
We repaid the full $20 million on September 26, 2008 but we due to the uncertainty in the credit markets we did choose to again fully draw that $20 million in October just to ensure that it would be available to us if needed. We're going to continue monitoring the financial markets and to the extent that the funds are not otherwise needed for operations we may choose to repay the amount drawn at any time.
As of September 26, 2008, our head count was 1, 557 compared to 1,632 as of June 27, 2008. As previously noted, we used certain pro forma or non-GAAP financial measures that are not calculated in accordance with GAAP. We use these measures because management believes these pro forma financial measures are useful to investors to facilitate period to period comparisons of our performance.
Our pro forma results of operations exclude the impact of fresh start accounting, deferral of revenue under SOP972, the non cash impact of acquisition of certain assets formally owned by Winex Networks, restructuring and stock based compensation expense. A detailed reconciliation is attached to our press release which we issued today and can be found on our web site.
I'm now going to provide you with a summary of our pro forma financial results for the first quarter of fiscal year 2009. On a pro forma basis, revenue for the first quarter was $117.5 million toward the high end of our guidance range, and that compares to $121.5 million in the fourth quarter.
Our pro forma gross margin in the first quarter was 30.1% compared to 36.9% in the fourth quarter of fiscal 2008 and 34.3% in the year ago quarter. As mentioned earlier, product standard margins in the quarter declined driven primarily by mix and clusters made up 59% of our server revenue in the current quarter compared to 55% in the prior quarter and 39% for all of fiscal year 2008.
This shift was expected given our broader product offerings and actually more closely realigns out business with the mix of server business that we see in the HPC market.
Product standard margins for the first quarter were 38% compared to 45.3% in the prior quarter and 36.1% in the year ago quarter. Operating expenses on a pro basis in the first quarter were $48.5 million compared to $53.2 million in the prior quarter, reflecting the impact of our cost savings initiatives and has resulted in a pro forma operating loss of $13.1 million compared to a pro forma operating loss of $8.3 million in the prior quarter.
I've included booking slides so you can see what the trend in composition is, but I'll ask you to flip over to Slide 9. I'd like to highlight a couple of things about the revenue results in the quarter.
As I previously mentioned, pro forma revenue remained relatively stable compared to both the prior quarter and the year ago quarter. This is something that we're actually obviously looking to as we talked about heading into this year that we needed to return stability on the P&L side in fiscal year '09.
For the second consecutive quarter we delivered strong customer service revenue performance driven by contribution from our Support Solutions Plus offering and we also saw good revenue growth in Professional Services as we were able to complete a large PS engagement in Europe in the quarter. That same deal actually contributed to the low margin results for services in the quarter.
Flip quickly to the next slide, and before I turn things over, I'd like to make another quick comment. We're re-evaluating our full year projections in light of the dynamic situation in the global economy. We do expect some changes although we're not in a position to share the specific updated guidance at this time.
So with that, let me turn the call over to Doug to fill you in on some of the things going on in sales.
As we discussed in previous calls, critical to our growth strategy is delivering differentiated solutions and services to customers within our targeted market segments, and today, I'd like to highlight a few wins consistent with that strategy.
The first win is with RTL, a digital media customer and highlights our ability to deliver an end to end system solution using SGI hardware, software and professional services, knowledge of broadcasting work flows and technologies. RTL or Radio Television Luxembourg operates several broadcast and radio stations throughout Germany.
RTL wanted to transition from a Legacy decentralized and traditional broadcasting system to a centralized digital system that enables interactive work flow for over 300 terabytes of data at a guaranteed performance of 1.45 megabytes per second per file system. After reviewing proposals from more than 10 different IT and broadcast suppliers, RTL picked the SGI solution. This was a very competitive bid with all the usual competitors and SGI prevailed.
SGI Professional Services and account management worked with RTL to create a centralized content depository with interactive work flow to enable collaboration between 130 client servers throughout their broadcast affiliates. We developed a total solution that utilizes Silicon Graphics servers, storage, software, third party equipment and professional service architects to revamp the RTL work flow.
We are the prime contractor that is transitioning a Legacy broadcast work flow into a digital end to end environment that delivers content including high definition TV to their affiliates at a minimum of 1.45 megabits per second reliably and without losing a frame in transmission.
As mentioned last quarter, we are bringing our high performance computing expertise to high performance business, and we continue to win orders with our adaptive data warehousing solution and partnership with Oracle. We are pleased to announce a key win with Konami Gaming.
Konami Gaming is a provider of slot machines and services to the casino industry. Casino's manage and monitor transaction rates that rival banks from thousands of slot machines they operate on a 24/7 basis. Konami wanted to help their customers to retain players and increase gaming revenues by providing real time analytical feed back regarding player trends so they could offer personalized marketing campaigns that include free slot play, promo's and other rewards to their players.
The combined Oracle and SGI adaptive data warehouse solution leverages the large share memory architecture of the Silicon Graphics Altix 450 server to accommodate on line analytical processing and data mining to deliver a complete business solution in a single server environment.
Further penetration within the manufacturing market segment is key to our strategy. As mentioned on the last call, we have over 30 hybrid solution wins that leverage the benefits of our shared memory and distributed memory servers. We have a strong pipeline of hybrid opportunities and continue to win new business with this differentiated solution.
This quarter, we launched our new visualization software under the Silicon Graphics VUE brand and we also launched associated solutions and services to support VUE in targeted markets. In the coming months you'll hear more about specific VUE solutions targeted at our key market segments, and Bo will provide more details about VUE in a few minutes.
Today, we're very pleased to announce an early VUE win from a large global manufacturing company who has embraced our visualization strategy, services and solution offering. This customer and many other global manufacturing customers have a growing need to collaborate interactively throughout many stages of the design process from different geographic locations around the globe in real time.
This solution involves our Virtu server nodes to support the aggregation of all data to a central data center improving security and easy management, and utilizes remote VUE software to enable this customer to interact on design efforts real time to any user to any location on any device anywhere in the world.
We have a strong and long heritage of visualization knowledge and capability and moving forward, visualization software, solutions and services will be a key part of the company's strategy.
Lastly, I'd like to mention that we continue to transform our selling efforts into a solution and services oriented approach. Our sales, service and engineering teams have deep knowledge and expertise in high performance computing or more specifically, processing, visualizing and storing large date, reliably and with speed. It is our mission to be known by our customers as a trusted advisor for their high performance computing and high performance business requirements.
Thank you and now I'd like to turn it over to Bo.
If you would go Slide 15, we'll just start by saying about a year ago you'll remember as we were rolling out the company strategy, we talked about there being three core elements that Doug just mentioned. Our customers over and over compute things, they store results or collect data and then they visualize those results.
For awhile the company had gotten out of the visualization business, so we said we're going to get back into it and in fact going to emphasize as we move through it, emphasize that the software and the solutions aspect of visualization. So what you see on Slide 15 in fact are some slides that we used last week as we announced VUE which is our visual user environment and it's really the rolling out of several suites of software over the next few months.
You'll also see us using the Silicon Graphics name and brand again. It's a powerful name that's well known in the industry, stands for 25 years of innovation in computer graphics. It is a strong brand and it is one that you'll see us using moving forward and represents strong suite of products. I wanted to quickly hit what we announced last week and give you a little more insight into that.
In addition to announcing it, we also were at the GEO Int. Conference last week. That's the Geo Spatial Imaging and Intelligence Conference and we showed the VUE software to many of the customers there and had a great reception from it. So basically what we heard last week and have heard over the course of the last year leading up to bringing VUE out is in fact, that many of our customers face the challenges that are shown on Slide 16.
This large aerospace manufacturing company that Doug just referred to in fact typifies those. Those problems are very big, complex data sets today. If you look at a magazine today and see an advertisement for a car, it looks like a beautiful car. That typically is not a photograph. Today, it is a digital image that may have six to seven hundred million elements representing that vehicle. So it's a digital image as opposed to a photograph of the car.
Some of you have seen releases that one of our customers did of the model of the human heart., two billion elements representing that model of the human heart. Many of you both use and know from watching what your children do that video and streaming video and multiple streams of video are becoming dominant in the way people interact. So today, how do you handle those really large problems and those massive volumes of data?
And then the second large problem is, how to do you let people access that information all over the world? Doug talked about this company wanting the enable their engineers and analysts all around the world to be able to access that visual information that they and interact together, so being able to distribute these very large models all around the world onto every device is a huge challenge.
And then the third point to be made here is, how in the world do you make sense out of all the various video streams that are coming in and sensor data and pictures and words. There's a tremendous amount of information and folks need to be able to have some context and be able to understand what's there to get insight and make decisions.
Our VUE solutions as shown on Slide 17 are aimed at doing just that. Over time you'll see us in the first incarnation having rolling out five software products to go with the hardware products that we announced about a year ago.
Those solutions start with what we call FusionVUE or the ability to visualize anything as shown on the left part of this chart. Our whole approach here is to enable people to look at any type of visual information whether it comes from streaming media, three dimensional models, photographs, you name it, to be able to visualize any type of visual information.
Secondly, shown in the middle of this chart is to enable people to view it anywhere. That's the RemoteVUE product which again will take information and enable it to be able to go anywhere in the world and then thirdly, enable people to look at it in the way that makes the most contextual sense for them and that's back to FusionVUE again, letting people look at things in ways that make sense for them.
Finally as shown in the left center of this chart, enable people to view everything that they want no matter how complicated, and that's SoftVUE and PowerVUE. As those products come along, what you'll see, in fact you heard the start with what Doug talked about, customers will be visualize anything no matter how complicated, distribute it anywhere in the world, look at it on any device from a hand held device up to a three dimensional movie theater, share the same information around the world and in some instances have PDA control what people are looking at around the world, and in other cases having a sophisticated three dimensional visual cave being able to control what people are seeing on their laptops or PDA's around the world and enable people to interact and be able to do that on using more central centralized systems.
What I'm suggesting here is stay tuned. You're going to see a lot of great stuff coming from us. If you look at Slide 18, part of what we're trying to show here is, we're enabling people to look at information in the way that it makes the most sense for them. So with our software, people can create a virtual world, or visual world that enables them to control how they think about the world or the model that they're creating and to better understand it and interact with it.
On slide 19, we've got great reviews from the press, from the analysts, from the customers who we exposed to this earlier and from whom we have some early wins. And then you would have also seen some articles in both the trade press, HBC Wire as well as an article in the technology section of the Wall Street about a week ago.
So we're off and running with the visualization software that we first started telling you about a year ago and we're really pleased with that.
I would end the formal remarks just talking about one of the other changes that's coming up in the company and we also put out a press release about this just a little bit before we got started today, and that is that the change of the CFO. Kathy as you know has been here for 10 years, was the controller of the company for 4 of those years and for the last 2 1/1 years has been the CFO.
She's been here during very difficult times of the company and has done a tremendous job in helping steer the company, shape it, stabilize it, work with customers, work with people inside the company and the company would not have been where it is if not for Kathy.
We're also pleased to be able to announce Greg Wood will be joining us. His official first starting day is on Monday of next week. Greg is both a CPA as well as having a law degree. He started his career off in public accounting, spent about 10 years at that, mostly with Earnst and Young, was at Memorex for about seven years both in the U.S. and outside of the U.S. and in that case was on the financial side of the house, great experience there.
And then moved to Intertrust, Liberate Technologies and others as the CFO, so we're really pleased that someone with Greg's background, strength and personal values and characteristics will be joining us. Again, he'll start with us next Monday in Sunnyvale.
Kathy has agreed to stay on and overlap with Greg for awhile to make sure that as you would expect from her that we have a smooth transition. Expect from us to be able to manage a smooth transition here.
I wanted to end by saying a special thanks to Kathy on behalf of the company. Thanks for all of the things that you've done for the last 10 years and from me particularly for the last year and a half. We really appreciate it. All of our thanks and best wishes in your new adventures.
We'll look forward to introducing you all to Greg as he comes on board. Again, he'll be here next week so we'll be glad to set up calls and times to talk with him and get to know him.
That's the end of our formal remarks, and we'll turn it back over to questions.
(Operator Instructions) There are no questions.
We would just say thanks to everybody for listening in. Thanks Kathy for all you've done. We appreciate it and best wishes moving forward from here. I'd invite everyone to give us a call. Kathy will be around for the next few weeks and we're also glad as Greg gets on board and gets his feet on the ground a little bit, would very much like to have you meet him and start getting to know him as he gets up to speed.
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