Cray Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Cray Inc (CRAY)


Q4 2012 Earnings Call

February 14, 2013 4:30 pm ET


Paul Hiemstra

Peter J. Ungaro - Chief Executive Officer, President and Director

Brian C. Henry - Chief Financial Officer and Executive Vice President


Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Brian S. Freed - Wunderlich Securities Inc., Research Division


Good afternoon. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to Cray Inc. 2012 Full Year and Fourth Quarter Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Paul Hiemstra, Director of Treasury and Investor Relations. Sir, you may begin.

Paul Hiemstra

Good afternoon. I'd like to thank everyone for joining us today. Participating from Cray are Peter Ungaro, President and Chief Executive Officer; and Brian Henry, Executive Vice President and Chief Financial Officer. Today's press release is available on the Investor Relations section of our website at This call is being broadcast live on the Internet and recorded for replay purposes. A replay will be available shortly after the call. You can access the replay by dialing 1 (855) 859-2056. International callers can dial 1 (404) 537-3406. You must then enter the access code 97433832. A replay will also be available in the Investor Relations section of the Cray website for 180 days.

I would like to remind each of you that today's conference call will contain forward-looking statements that are based on current expectations. Forward-looking statements include statements about our financial guidance and expected future operating results, our product development and new product introduction and acceptance plans, our ability to expand and penetrate our addressable market and other statements that are not historical facts.

These statements are only predictions and actual results may materially vary from those projected.

Please refer to Cray's documents filed with the SEC from time to time concerning factors that could affect the company and these forward-looking statements.

Our presentation includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release, which is posted on our website and included with the related 8-K furnished with the SEC.

With that, I would like to turn the call over to Peter Ungaro.

Peter J. Ungaro

Thanks, Paul, and thank you, all, for joining the call today. I'm going to start with some comments on our 2012 fourth quarter and full year performance and turn it over to Brian, who will go through our financial results and outlook. I'll wrap up by discussing our plans for 2013 and then open the call for Q&A.

We had a great fourth quarter and full year in 2012. As announced in January, we posted record revenue and operating profit for the year, along with a number of other significant achievements. We revamped our product offerings from top to bottom, dramatically expanding our addressable market and at the same time, filled momentum across both the supercomputing and big data markets, and we finished the quarter with over $320 million in cash and investments.

Our biggest goal for the quarter, which we achieved, was to complete the installation and acceptance process of the largest system in our history at the University of Illinois, a system known as Blue Waters. With the goal of delivering sustained performance of one petaflops on a range of challenging, real-world science and engineering applications, this is one of the most ambitious projects we've ever undertaken. I'm proud to say that we met these goals and the university recently announced that they have 4 applications running at over a sustained petaflop in the areas of astrophysics, nuclear fusion, computational chemistry and seismic analysis.

They also ran the largest hurricane model ever performed and did so in simulating Hurricane Sandy in order to gain further insights into the unique nature of this super storm.

Sitting right next to the Blue Waters supercomputer is what we believe is the fastest, most robust storage system on the planet. This massive data storage solution features the fastest data access rate in the world at over 1 terabyte per second, across over 25 petabytes of our Sonexion Storage. It's a great example of how supercomputing technology will begin to change the game in the world of big data as the line between traditional supercomputing and big data continues to bore.

As we've previously announced, we weren't able to complete our system acceptance at the Oak Ridge National Laboratory, which was originally planned to be completed in December.

We've reset an acceptance plan with Oak Ridge, which allows them to begin using this system in January and are now targeting final acceptance in the second quarter of 2013.

Also during the quarter, we completed our acquisition of Appro International. This is a great step for us as it expands our product line to now include highly flexible cluster solutions, giving us the strong offering for customers who want different technology options.

This expanded product set also serves as a broader platform from which to deliver our storage and big data offerings to the market, allowing us to capture a bigger percentage of customers' HPC budgets.

We've already completed the initial sales and marketing integration work and we're focused on winning new business around the world, as well as finalizing the back office parts of the integration plan.

We also racked up a number of exciting high performance computing wins during the fourth quarter. We were awarded a contract at the National Meteorological Service in Germany, also known as DWD, one of the world's premier numerical weather prediction centers.

We'll be delivering an XC30 supercomputer and a 3-petabyte Sonexion Storage System to the center beginning in 2013, with an upgrade to the supercomputing system in 2014.

We were also awarded a $39 million contract by the North-German Supercomputer Alliance or HLRN to deliver a Cray XC30.

This will be a distributed supercomputing solution located across 2 separate cities in Northern Germany, Hannover and Berlin, requiring a substantial integration effort in order to operate as one combined system.

Both of these wins feature our latest-generation XC30 supercomputer, which we began shipping ahead of schedule during the fourth quarter. Developed under the codename Cascade, the XC30 is our most advanced system ever, featuring our new Aries system interconnect, an innovative packaging and cooling solution to lower customers' total cost of ownership, our next-generation Cray Linux Environment that also supports a wide range of ISP applications, and the ability to integrate a wide variety of processor types, including the new Intel Xeon processors.

This system is a great real-world showcase of our Adaptive Supercomputing vision, which in a single supercomputer, allows us to customize the system to best match unique customer needs.

This is the biggest R&D effort we've ever done and has produced a highly innovative system that will be our flagship supercomputer over the next few years.

As we've discussed before at a high level, we're focused on 2 distinct, but highly interrelated markets. The supercomputing segment of the high performance computing market featuring our high-end supercomputers and scalable clusters, and the big data market where we currently feature our high performance storage solutions and our uRiKA graph analytics appliance.

We believe that we are uniquely positioned to take advantage of the fusion between traditional compute-intensive supercomputing applications with the high-growth, data-intensive applications found in the world of big data.

On the storage side, we have 2 strong offerings. First, the Cray Sonexion 1600 storage appliance, which we launched during the fourth quarter.

This offering leverages the Lustre filesystem to scale the highly integrated Sonexion from terabytes to petabytes of capacity, all in a modular architecture well suited to a broad range of applications and workloads.

A great example of this is in Korea, where we won a standalone storage contract to deliver a Sonexion 1600 to the Korean Meteorological Administration, who's currently one of our supercomputing customers. We competed head-to-head against other major storage vendors in a comparison that was independent of the supercomputer.

This 1.5-petabyte parallel filesystem was installed during the fourth quarter.

Second, we offer component-based Lustre filesystems for customers that need flexible network attached storage solutions. Our win at HLRN was a good example of this with their 2 separate sites in Northern Germany. HLRN users needed both local and remote access to resources located at each site.

Our storage teams designed an integrated solution for multiple vendors to move data and files easily across their wide-area network, optimizing for productivity and efficiency at each site.

Our big data graph analytics team, YarcData, continued to gain momentum during the fourth quarter. We delivered the 2012 winter release of the uRiKA software platform, which includes more new features and tools for greater ease-of-use and streamlined adoption into current IT environments.

Some of our new uRiKA wins in the quarter included a national laboratory and a new government customer doing detailed analysis on big data.

Another new uRiKA customer, the Pittsburgh Supercomputing Center, recently launched their uRiKA plants, which they creatively named Sherlock and they're using it to discover unknown relationships or patterns hidden in an extremely large complex bodies of information and then extending the use of these techniques to a wide range of scientific research projects.

We've also received a number of uRiKA endorsements from market analysts including Gartner. The latest endorsement being from Chartis Research, a financial services analysis firm, who positively highlighted the uRiKA and its market potential in their 2012 enterprise governance, risk and compliance solution report.

Without a doubt, Q4 was a great quarter for us.

With that, I'll turn it over to Brian to take you through the numbers and the outlook.

Brian C. Henry

Thanks, Pete, and good afternoon, everyone. Before I get into the 2013 outlook, let me first take you through our 2012 full year and fourth quarter financial results.

For the full year 2012, revenue was $421 million, an increase of more than 75% compared to 2011.

Product revenue grew substantially to $354 million, driven by our high-end supercomputing business and growth in storage. Service revenue for the year was $67 million.

Net income for 2012 was $161 million or $4.27 per share, fully diluted.

Please note we began reporting non-GAAP measures this quarter and we'll discuss in more detail shortly.

Non-GAAP net income for the year was $33 million, or $0.88 per share, and adjusts for several items including the $139 million gain from our asset sale to Intel.

For the fourth quarter of 2012, revenue was $189 million and net income was $14 million.

Non-GAAP net income for the fourth quarter was $17 million.

Our annual results include Appro's results beginning after the transaction closed on November 21 to December 31, or about 6 weeks in 2012.

Appro added $600,000 in revenue and including the amortization of intangibles associated with the acquisition, had a net operating loss of $1.3 million during that period.

For the year, total gross margin was 36%. Product margin was 35% in line with 2011, and service margin was 43% compared to 49% in 2011.

Roughly, half of the service margin difference between the years was a result of higher incentive compensation in 2012.

For the fourth quarter, total gross margin was 29%, driven somewhat lower as we recognize revenue on a large system. Large systems often carry slightly lower margin than our target margin.

Included in our product revenue for 2012 was $50 million from our Storage and Data Management business unit, which grew substantially for the year.

Gross margin for this group was 29%, lower than what we're targeting. This year's margin was significantly impacted by the overall profit on the large contract we recognized in the fourth quarter.

It was also the first year delivering our Sonexion storage and we got off to a very strong start in 2012.

We believe there is room for margin expansion as this business continues to grow.

Our operating expenses for 2012 totaled $122 million compared to $93 million in 2011. This increase was due to several factors including $11 million in increased incentive compensation, increased investments in our storage and big data efforts, $6 million fewer R&D co-funding credits and additional expenses related to our acquisition of Appro.

For the fourth quarter, operating expenses were $38 million compared to $18 million in the prior-year period, also impacted by the items I just mentioned. Most of the year's incentive compensation occurred in the fourth quarter.

Moving to the balance sheet. Total cash and investments at the end of the year were $323 million, a $41 million increase from the end of the third quarter of 2012.

Several variables contributed to our strong cash position at year end, including strong collections that resulted in very low accounts receivable balances at year end. We collected a vast majority of cash associated with the Blue Waters system near the end of the year instead in the first half of 2013 as we had originally projected.

Inventory at December 31 was $90 million with more than 60% or $56 million already out at customer sites and in the acceptance process.

As I mentioned, we began to report selected non-GAAP measurements this quarter. We believe this non-GAAP measure serves as a useful supplemental information providing additional insight regarding our core business operations and facilitates improved comparability with historical core results.

This view adjusts for certain noncash unusual and infrequent items included in our GAAP results.

For example, our non-GAAP net income excludes stock compensation, restructuring charges, amortization of purchased intangible assets and acquisition-related costs.

The non-GAAP view also excludes the gain, and the tax we recognized from the asset sale to Intel during the second quarter of 2012.

We also adjust our both tax provision to reflect cash tax considering benefits principally related to our net operating loss carryforwards, NOLs, and changes in the valuation allowance held against our deferred tax assets.

This view is also adjusted for the amount of additional taxes or tax benefits we would accrue on non-GAAP adjustments at tax rate, which reflects the benefits from our NOLs.

I would now like to take a moment to discuss our outlook for 2013.

While a wide range of results remains possible, we expect revenue to be approximately $500 million for the year, revenue is expected to ramp quarterly during the year with roughly $70 million in the first quarter and about 45% of total revenue coming in the fourth quarter.

For the year, overall gross margin is anticipated to be in the mid-30% range.

In particular, I would like to note our acquisition of Appro is likely to put some downward pressure on our margins in 2 ways. First, as we've discussed previously, Appro's business model had lower gross margin historically below 20%. Second, we anticipate nearly $2 million in amortization of certain purchased intangibles associated with the acquisition to further impact our gross margins in 2013.

Total operating expenses are expected to be in the range of $160 million, which includes approximately $8 million in stock-based compensation and amortization and purchased intangibles. We are making significant investments in our business which we believe will drive future growth. Other income and expenses are expected to be in the neutral range in 2013, mostly dependent on foreign currency fluctuations. Based on this outlook, we expect to be profitable for 2013.

Our reported effective income tax rate for 2013 is expected to be about 40%, but is dependent on a number of variables, including the level of geographic distribution of taxable income and the impact from changes in the valuation allowance held against our deferred tax assets.

However, the large majority of our income taxes for 2013 are expected to be offset by previous net operating losses and thus will not require cash disbursements.

Based on this outlook, our effective tax rate is anticipated to be about 8% to 10%. Share count, when profitable, should be about $40 million, but is dependent on a number of factors including our share price.

We expect cash and investments to fluctuate significantly quarter-to-quarter, but to generally come down during 2013 as we turn to more normalized working capital levels.

As usual, our cash balances are highly volatile and subject to a number of factors, including the timing of customer installations, individual contract variations and the timing of customer acceptances and collections.

The combination of cash and investments, plus accounts receivable or quick assets, is less volatile and probably a better measure to track and simply cash and investments on their own.

At the end of this year, this totaled $337 million.

In summary, 2012 was a great year, highlighted by the strength in our high-end supercomputing business and gaining traction in our growth initiatives. We anticipate solid revenue growth and profitability in 2013.

With that, I'll turn it back over to Pete.

Peter J. Ungaro

Thanks, Brian. I'll finish up our comments by taking you through our goals for 2013. We have 3 main focus areas for the year. Our first is to achieve our revenue goal of $500 million. On the surface, this is solid growth out of almost 20% over 2012.

But I can give you another view of it as well. If you adjust 2012 by backing out the huge Blue Waters deal, which is a bit of an abnormal single transaction for us, you'll see that the growth we're expecting in 2013 is actually much stronger than this. Actually, well over 50%.

This is a function of several things, including our acquisition of Appro, which we expect will have more than $60 million to our supercomputing revenue in 2013 and continued strong growth in storage and big data.

But it also highlights the growth we're anticipating in our core supercomputing business as well. With our brand-new XC30 supercomputer shipping to customers, we're winning new deals all around the world, and we have a compelling roadmap ahead for this system as we already announced future planned support of both the Intel Phi coprocessor, as well as NVIDIA GPUs in our XC family.

We have a number of large system installations planned this year with significant installs in each of our major customer geographies. As I mentioned earlier, we also plan to complete the final phase of the upgrade to the Titan supercomputer out at Oak Ridge during the second quarter.

We continue to see strength on the commercial side of our business and expect to announce new deals in this segment with each of our offerings in 2013 with a plan to drive more than 10% of our total product sales from commercial customers again this year.

I'm particularly pleased to be targeting this goal for the second year in a row as it demonstrates the strength of our products and the active adoption of our supercomputing technology beyond our traditional customer segments.

We've added significant breadth to our sales team over the last year, increasing our worldwide sales personnel on the field by over 50%.

We've also added experts focused on different verticals within the HPC and big data markets, including energy, manufacturing, financial services and life sciences.

Our second goal for the year is to establish a stronger presence in the big data market. Here, we're focused on growing our business in some of the fastest-growing markets in all of IT: high performance storage and Big Data Analytics.

In Storage and Data Management, our focus is to continue to grow this business, both in the storage attached to Cray systems, which we have a lot of momentum in right now, as well as pushing out and attaching our storage solutions into non-Cray systems, what we call our cluster-attached business.

We currently have 2 commercial customers in beta test for our cluster-attached storage offerings and assuming those go well, we plan on announcing this solution in the first half.

We have a number of significant complex Sonexion installations planned for the year, including the Pawsey supercomputing center in Australia and the DWD in Germany.

These are significant wins and executing on each of them will go a long way to building our momentum in the storage market.

We believe we can grow our storage business 2x to 4x faster than our targeted storage market is growing overall, which is about 12% according to IDC.

In your data, our uRiKA graph analytics appliance got off to a strong start in 2012 and we believe it can grow significantly in 2013. We continue to market solutions for financial services, life sciences, cyber security and scientific research segments.

Most of our success in 2012 was in the cyber security and research segments and while we expect to continue to grow in those verticals this year, we also anticipate adding new customers in the commercial market segments in 2013.

We now have leaders in all 4 of our targeted vertical markets for uRiKA and recently added our first dedicated person in Europe.

The graph analytics market is still in its infancy and has the potential to dramatically change the way people deal with complex problems across related, but distinct data sets.

Our uRiKA graph appliance is well positioned to play an important role in this space.

Our third goal for the year is to build a significant cluster solutions business. This is really about delivering on our commitment to make our Appro acquisition accretive in its first year. Our strategy here is threefold. First is to integrate our cluster solutions offerings into our worldwide sales distribution. We're off to a fast start here, building our pipeline and working on a number of new opportunities around the world. Our scalable flexible cluster solutions are well suited for a wide range of customers from universities to government labs and different verticals within the commercial market.

Second is to work with current Cray customers to grow this business at a quick pace. All of our current customers also buy clusters as part of their data center and this provides us with a new offering for them in the area they are already working with us in.

And third is to leverage our supercomputing and big data technologies to drive further differentiation in our cluster offerings, driving higher value for our customers and additional margin out of this business.

We're continuing to explore different options here and I expect we'll have more to discuss on this down the road.

In conclusion, I'm extremely pleased with what we've accomplished in 2012, but even more excited by the excellent position we put ourselves in as we shift focus to 2013. I think it's going to be another very exciting year for our company.

With that, I'd now like to turn the call over to the operator to begin the Q&A.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Chad Bennett.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So Brian, maybe a quick one for you. So on the cash position and kind of where -- what you expect this year, I understand we kind of ended the year at a perfect storm in a good way in terms of working capital and monetization there. I guess I just want to understand if I'm thinking about the year right from a cash perspective. If you do what you say you're going to do on the revenue line of $500 million, the margins are where we think they are. If I just look at kind of an adjusted EBITDA number, if you want to call it, kind of factoring in your noncash expenses like stock comp and amortization, you should probably generate $30 million to low $30 million of, call it, adjusted EBITDA. So I guess, what I'm asking is, so the working capital is really low right now or receivables and inventory are really low right now, do you expect that adjusted EBITDA to be absorbed and cash to net be down from where it is today?

Brian C. Henry

The answer is -- to that is we would expect it to be down from where it is today because as you said, we had a perfect storm where we collected the Blue Waters amount just before the end of the year and therefore, receivables were a low at $30 million. So it is very hard for us to predict what our balance sheet will be at the end of the year. A lot of that will be dependent on the timing of things at the end of the year and what activity we have going into next year. But if it were to normalize, we would expect that the combination -- well, cash would probably down. Now when you compare cash plus accounts receivable, that's a less volatile number and takes out some of the timing that relates to just collections and receivables. And that combination, again, hard to tell with all the things that we have going on, but that's likely to be down much less, if at all, compared to what cash might be down.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. Receivables, I mean you've -- I don't want to hold you to a number, but cash could be down kind of $1 to $2 per share.

Brian C. Henry

I would say if you would -- there are some balance sheet forecasts that you could get that kind of reduction in cash.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay, fair enough. Second, Pete, on the storage or Sonexion kind of growth rate or expectations this year, you said 2 to 4x your targeted kind of storage industry growth rate at 12%. So you're going to grow 2 to 4x off that $50 million Sonexion or storage revenue number in '12, is that what you're saying?

Peter J. Ungaro

That's what we're targeting right now, Chad. I mean, so if you did take the lower end of that, we'll be into the $60-plus-million range and could be higher than that. I feel -- go ahead.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

And would you expect that the growth or the composition this year of your storage revenue to be -- you kind of the storage attached to your systems versus other people's. Do you have any idea what that mix might be?

Peter J. Ungaro

That's a great question, Chad. So we're coming off a year that I could definitely tell you was a 100% attached to Cray and 0% on everybody else. So we definitely want to improve on those numbers and I mentioned that we're likely to announce our offering in the first half of this year. Really, that's our upside potential on the number and I think we can grow in just the storage attached to Cray systems part of the market, but we have kind of unknown upside as how far we can grow in this nonattached market and that's why I kind of gave a range of 2x to 4x depending on how that is. I would love to see that number grow very quickly over the course of the year and that's something we'll be very focused on.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. And Pete, where are we on uRiKA? And I know you gave an update on the call, but in terms of commercial traction there and what should be our expectation of -- I'm assuming the metric you want us to kind of track that business this year on is kind of new customer wins and bookings, if you split them up, because revenue is still going to be pretty modest in the grand scheme of things. So are we going to see kind of new commercial customer wins over the course of the year and what are the prospects for the first half there?

Peter J. Ungaro

Yes, I mentioned that we announced a few new customers in the fourth quarter, but we had originally launched with 1 commercial customer, a mail clinic, and picked up another during the year. But really, I think that's a big focus for us and I would say, Chad, pin myself down a bit, I would say we really expect to start growing on the commercial side of our business in the first half of this year. We really want to start adding customers and especially the financial services and kind of life sciences, health care segments. It's going to be a big target for us here in the first half of the year. And then hopefully, in the second half, we could continue that momentum. I do think we're still going to do great in the cyber security segment, as well as in scientific research, but in order to really accomplish what we want to get done this year, a big thing that we're focused on is the commercial segments of that product and I feel like we're on a good path to get there.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

All right. And Brian, what should the expectation be for Appro in the March quarter from a revenue standpoint?

Brian C. Henry

Well, we haven't given any guidance on any of the specific product lines by quarter. So I'm not really going to help you there. We, of course, just finished the acquisition in November and so we're just combining the sales forces and combining the sales strategy. And I think, and Pete probably referred to it, we expect it to ramp up during the year Appro's revenue.

Peter J. Ungaro

And so I would think, Chad, that we'll -- we're not expecting a huge first quarter with what was going on in the fourth quarter because we're just doing the acquisition. But over the course of the year, to get to our target of getting over $60 million, we're going to have to be ramping that business and I feel like our pipeline, not just in the U.S., but really worldwide right now especially strong in Japan and Asia I would say, is building up nicely and I feel like we have the opportunities that are coming into the pipeline. The pipeline is growing almost weekly right now and I feel like we're starting to get the momentum that we're hoping to get in that business to hit our goals this year.


[Operator Instructions] Our next question comes from Glenn Hanus.

Glenn Hanus - Needham & Company, LLC, Research Division

Maybe to shift a little bit to the -- just the core HPC business for a second. To ask the obvious question with sort of sequester things looming, can you kind of comment on your visibility compared to your 2013 goals? Your visibility on 2013 for the core HPC business? The sense internationally and then the U.S. Federal business and the issues with sequester, can you kind of comment around all those issues?

Peter J. Ungaro

All right, Glenn, I'll give it a shot. So we -- just to start off with overall in that business, we just launched our brand-new XC30. We feel really good about that product, about where we can take it and about the reaction that we're getting from customers to that offering. So I feel like we hit the target with what we're trying to accomplish with that. And then adding in our Appro acquisition with our new cluster solutions that gives us a nice broad platform to go and attack a lot of customers. So I feel like from a product portfolio standpoint, we're looking really good shape both from just the overall offering from a breadth of hitting the market and from a competitive perspective. So now we can kind of take it into kind of region by region. In the U.S., of course, you're correct. We believe actually sequestration is likely to happen at some way, shape or form and -- but we should know over the next -- in March time frame roughly of what's going to play out there. Who knows? It's hard to predict the government exactly. I would say it's impossible to kind of model that into our business, but I'm very confident in the 2013 numbers that we're giving that the programs that we have that we're planning on, we have very good visibility into that business that I don't think we're going to be severely impacted from that in 2013. Again, it's a little hard to model because we don't exactly know what's going to happen in that space, but we are expecting even though when we came out with our $500 million target, we are expecting sequestration to happen or something like sequestration to happen in the U.S. Around the world, we're seeing, I would say, increased investment. I mean, we have a stimulus program that's going on in Japan, which likely won't impact our 2013 business so much, but may help us in 2014 as those programs get going. Our Asia Pacific business is starting to really pick up. We've brought on a number of new sales leaders in different countries in that business and I feel really good about that. And Europe's been very strong for us. We've had a number of wins over the past year and I think we're going to continue to be very strong in Europe. So I feel like we have continued good headlights into that business. We can see that. We can't see the cluster-Appro, ex-Appro business as well because that's a tighter timeline as we're just discussing with Chad that those deals -- you typically happen much quicker, but I think when we look at the pipeline, I feel good about where that business is right now. And in our core high-end business, I feel like we just got a strong offering out there and we're not seeing customers shy away. So I feel good about where we are.

Glenn Hanus - Needham & Company, LLC, Research Division

And the win rates in the -- versus IBM and stuff, where is -- what are you seeing from IBM these days?

Peter J. Ungaro

IBM is by far our biggest competitor in the high end as you well know. They have their pretty standard set of offerings that they've had for a little while now, which is their high-end power systems, their clusters, iDataPlex, as well as their Blue Gene Q machine. I feel like they had an initial wave when they first announced the Blue Gene Q of some pent-up demand around Blue Gene because they hadn't had a recent Blue Gene system for a while. And now, I feel like we're really back in the game and we're competing very nicely. I mean our win rates are very high. They're not perfect, but they're very high still and I feel like with the XC30 and the roadmap that we have ahead for it, I feel it's going to stay pretty good.

Glenn Hanus - Needham & Company, LLC, Research Division

And then shifting to you said of R&D milestones and deliverables that -- or sort of supplier dependencies in 2013, can you kind of comment on how we should think about where there could be risk factors and what are your key milestones in R&D this year?

Peter J. Ungaro

Yes, that's a great question. So the way that Cascade is shipping right now is -- or the XC30 is shipping with the Intel Sandy Bridge or Romley platform is what's shipping right now. And Intel has publicly announced that they have a next-generation of that, that they call Ivy Bridge that's coming out later this year that we definitely plan on putting into that platform. And we've also announced that we're going to support the Xeon Phi and the NVIDIA GPU later this year. So we have quite a roadmap ahead of us. Now Xeon Phi is already shipping. So I feel you should feel pretty confident from a supplier constrained position. Obviously, Sandy Bridge has been shipping for a while. Sandy, NVIDIA GPU were already shipping that was part of our Oak Ridge machine that we shipped into small part of Blue Waters. So a lot of our supplier issues are less than they were in 2012 from that perspective. We still do need Ivy Bridge and are hoping for that here soon. But all in all, I feel like it's a lower level of risk than we had last year in -- especially with processor vendors.

Glenn Hanus - Needham & Company, LLC, Research Division

And do you have any sort of company-specific execution milestones that you've got to hit in order to have sort of lightyear deliverables or are you pretty much there?

Peter J. Ungaro

No, we have to develop the blades that are going to attach to these future processors. So especially the NVIDIA GPU and the Xeon Phi, we're going to have to build a special blade within the framework. So it's our Adaptive Supercomputing vision, where we can put in different blades of different processor technology all into the same system. So the core system is there and the core software, but then we've got to build these other blades and then build the software around it to initiate them and such. So it's not a lot of what I would call major development risk, but there's development that needs to be done. And so that's the way that I would think about it. It's not like we're building new systems or anything. It's new blades in kind of an existing working machine.

Brian C. Henry

There wouldn't be a new blade required to add Ivy Bridge.


The next question comes from Brian Freed.

Brian S. Freed - Wunderlich Securities Inc., Research Division

Can you talk a little about the investments you've made in sales and marketing, particularly within the context of developing an enterprise class sales force? Do you feel like you have the necessary infrastructure in place to date to really attack that vertical or is that still going to require some investment going forward?

Peter J. Ungaro

Yes, that's a great question. So the way that I think about it from a -- especially the commercial side is when we did our investments in sales and marketing over the last year, we've really invested in kind of 3 major areas. The first is actual salespeople kind of geographically spread out in different territories somewhat some kind of key account management, major account management and somewhat more geographical territories. The second area that we invested in was experts within different verticals. So for instance, we have 2 people in our life sciences vertical, 1 more traditional HPC leader, 1 more of a big data leader within vertical. We added a person in financial services vertical and one in energy and another in manufacturing. So these are really industry experts that can really help us to think about applying our products and solutions to a vertical market. So we kind of have the geographic sales coverage, as well as the vertical expertise. And then the third part that we invested in, Brian, was really technical support people to help to make those guys as productive as possible. From a technology perspective, we sell very highly technical products and so we need to -- as we add in sales leaders and marketing leaders, we need to add in technical support people to help them and work with our customers at a much more detailed level. So I feel like we really have a structure that allows us to continue to go after and start to really go after those market segments. I do feel that as we continue to grow, if we can continue to grow at the pace that we're on, we're going to be adding more salespeople into that structure. So I think over time and you probably do that more emphasized in the commercial segments as you correctly point out versus in more of our traditional segments where I would say we have a lot more coverage today, but I do feel like we're in really good shape, especially for our goal this year. So I would say we're staffed pretty much now for achieving our $500 million goal for 2013. And if we can continue to grow highly in 2014, we'll probably be adding some more people in the second half of this year to get ready for that.

Brian S. Freed - Wunderlich Securities Inc., Research Division

Okay, that's great. And then I think you said before I think you acquired Appro at maybe low 20% gross margins or somewhere similar. And I think you said you expect to grow those gross margins over time. Is that something you expect to grow as a revenue grows throughout the year? Is that going to be kind of a linear expansion of margins there? How should we think of that?

Peter J. Ungaro

Well, I -- you're right, we do expect to be able to improve the margins for what Appro used to have historically with the combined purchasing power and that was part of the work we did in due diligence. Whether it's progressive each quarter, it's hard to say because each quarter is really dependent on individual deals. I would just say over time, we expect gross margins to be better than they were historically when Appro was independent.


[Operator Instructions] And we have no further questions in queue at this time. I now turn the call back over to the presenters.

Peter J. Ungaro

Thank you. I'm excited about our prospects for 2013 and what we're building for the future. Our supercomputing product offerings are strong and our big data offerings are continuing to gain momentum in the market. I believe we're well positioned to follow on a great 2012 with a strong 2013. Thank you, all, for joining the call today and for your continued support of Cray. Have a great day.


This concludes today's conference call. You may now disconnect. Thank you.

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