Cray Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.31.13 | About: Cray Inc (CRAY)

Cray (NASDAQ:CRAY)

Q2 2013 Earnings Call

July 31, 2013 4:30 pm ET

Executives

Paul Hiemstra

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

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

Analysts

Glenn Hanus - Needham & Company, LLC, Research Division

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Joseph Fadgen

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

Operator

Good afternoon. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Paul Hiemstra, you may begin your conference.

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 www.cray.com.

This call is being broadcast live on the Internet and recorded for replay purposes. A telephonic replay will be available shortly after the call. You can access it by dialing 1 (855) 859-2056. International callers can dial 1 (404) 537-3406. You must then enter the access code 24952249. A replay will also be available in the Investor Relations section of the Cray website for 180 days.

I'd like to remind each of you that today's conference call will contain forward-looking statements that are based on our 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'll start with some comments on our second quarter performance, then turn it over to Brian who will go through our financial results and outlook. I'll wrap up by discussing our plans for the rest of the year and open up the call for Q&A.

We had a good second quarter as we continue to make progress on our goals for the year while delivering solid revenue results. We also had a number of exciting product announcements and contract wins over the past few months across each of our products and solutions. For the second quarter in the row, our revenue exceeded the guidance we previously laid out, and with continued strength in our business overall, we've now raised our full year revenue outlook. While we were not profitable for the quarter, we remain on track and expect to be solidly profitable for the year.

In our supercomputing business, we achieved the main goal we laid out for the second quarter, which was to complete the final phase of the upgrade to the Titan XK7 out of Oak Ridge National Laboratory, making it one of the fastest supercomputers in the world. This 200-cabinet system now offers users a hybrid architecture of both CPUs and GPUs. Titan is enabling new scientific discoveries as it gives you the tenfold increase in performance over its predecessor.

At the International Supercomputing Conference in Germany last month, 6 Gordon Bell awards were presented. These awards recognize outstanding achievement in high-performance computing applications. We're excited to say that 4 of the 6 winning applications were run on the Titan supercomputer, a significant achievement for the team at Oak Ridge, and I'd like to add a personal congrats to each of the winners. Titan is enabling a broad range of research in many different disciplines, including just recently being used in the search for a low-cost source of renewable energy and in drug design and discovery where biophysicists are working to design more efficient drugs with fewer side effects.

One item to note is that our product margin for the second quarter came in lower than our target range, mainly due to a technical issue with the component, which resulted in higher cost than we originally anticipated on a single large installation, which was this Titan upgrade at Oak Ridge I just described. Brian is going to provide some additional details about the financial impact, but I want to note that without these costs, our overall gross margins for the quarter would have been very strong, and that we continue to expect our total margin for the year to be in line with the original forecast we laid out, which is also in line with our historical range. We do not expect this issue to have an economic impact in future quarters.

We had a number of exciting supercomputer wins over the last few months, both in the U.S. and around the world, including just last week when we were awarded a contract to deliver an XC30 supercomputer and Sonexion storage solution to the University of Edinburgh in Scotland as part of the ARCHER project. ARCHER is the next generation of a national high-performance computing facility in the U.K., a follow-on to the HECToR project, where they are currently using a Cray XE6 system. These programs drive the premiere academic supercomputing facility in the U.K., and we are honored to have been again selected by the Engineering and Physical Sciences Research Council to deliver their new flagship system. In fact, this is the fifth generation of this program and the first time the same vendor has repeated as the winner in 20 years. So we're very excited, and we're planning to deliver the XC30 and Sonexion Storage to ARCHER later this year.

Also in Europe, last month, we were awarded a new contract to deliver an XC30 supercomputer and Sonexion storage to the European Centre for Medium-Range Weather Forecasts. They are one of the world's premiere numerical weather prediction and research centers, focusing on global modeling and data simulation systems for forecasting and research. We're proud to have been selected to deliver the center's next-generation system, and we plan to begin delivering this system during the fourth quarter and expect the full system to go into production next summer.

In cluster solutions, we had a solid quarter, with acceptances at several sites and new orders across a number of verticals, including government, academia and financial services. The largest of these new orders was from a government customer for more than $10 million.

In our Storage and Data Management group, the quarter was highlighted by the 2 large Sonexion storage system wins at ARCHER and ECMWF. While our second quarter was a little light in storage, our quarterly revenue isn't really representative of what we're expecting for the year, and we're still planning for a strong storage growth in 2013. We recently made a major announcement describing how we're going to attack the broader high-performance storage market, and I'll talk about that more in my full year comments.

In Big Data analytics, our YarcData group had a strong quarter. YarcData's Urika system is a data discovery appliance that scales the unprecedented levels of performance, enabling the discovery of unknown or hidden relationships within large complex data sets. In the last quarter, a major government customer made a significant addition to their existing Urika system, and we also added 2 new government organizations as customers.

In financial services, a leading firm is leveraging Urika for customer analytics cross-selling and upselling. And another worldwide bank is using Urika in risk management and compliance. Also, as an example of the wide applicability of Urika, a large telco is now using the system to understand how service actions can impact customer churn.

And 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 outlook, let me first take you through the second quarter financial results.

For the quarter, revenue was $84.5 million, and we were nearly breakeven with a net loss of $150,000. Product revenue was $62.4 million, and service revenue was $22.1 million.

As we began with our fourth quarter 2012 release, we are continuing to report certain non-GAAP measures, which adjust for selected noncash, unusual and infrequent items included in our GAAP results. We also adjust our book tax provision for certain items, including the impact of noncash items such as the benefits principally related to our net operating loss carryforwards and changes in the valuation allowance held against our deferred tax assets.

Our non-GAAP operating loss for the second quarter of 2013 was $7.5 million or about $2.3 million less than our GAAP operating loss. Our non-GAAP net loss for the second quarter was $7 million compared to our nearly breakeven performance on a GAAP basis, with a difference largely driven by a partial release of the valuation allowance held against our deferred tax assets. This release resulted in an additional tax benefit of about $5.5 million for the quarter. Our deferred tax allowance was adjusted during the quarter to reflect an updated view of our future U.S. taxable income.

For the second quarter, total reported gross profit was 32%, and non-GAAP margin was 33%. Reported product margin was 24%, and service margin was 54%. Service margin was slightly higher than we expect going forward due in part to lower incentive-based compensation and the impact of a custom engineering contract milestone we passed in the quarter.

As Pete mentioned, product margin for the quarter was negatively impacted by higher-than-anticipated costs related to the Titan system at Oak Ridge, which was accepted in the second quarter. These costs represent a drag of 8 percentage points on product margin and 6 percentage points on total gross profit margin for the quarter. Without these additional costs, product margin would have been 32% and total gross profit margin would have been a very strong 38%.

Operating expenses for the quarter totaled $36.6 million compared to $22.1 million in the second quarter of 2012. Non-GAAP operating expenses for the quarter were $35 million compared to $20.9 million last year. We recognized $15 million in R&D co-funding credits in the second quarter last year, representing the vast majority of the difference. This is partially offset in the second quarter this year by lower incentive-based compensation expense.

Our second quarter operating results include $3.5 million for depreciation. Noncash pretax items, excluded for non-GAAP purposes for the second quarter of 2013, were: $0.6 million for amortization of intangibles, $0.1 million for purchase accounting adjustments and $1.6 million for stock compensation expense.

Total cash and investments at the end of the second quarter were $253 million, up slightly from $251 million at the end of the first quarter. Net working capital at the end of the second quarter was $285 million, also slightly higher than at the end of the first quarter. Inventory at June 30 was $126 million compared to $79 million at the end of last quarter, with about 21% or $27 million out at customer sites in the acceptance process. As a reminder, we typically don't buy inventory until a contract is anticipated. Thus, higher levels of inventory on our balance sheet indicates we are expecting a strong second half of the year.

I would now like to take a moment to discuss our outlook for 2013. While a wide range results remains possible, we are increasing our outlook by $20 million and now expect approximately $520 million in revenue for the year. Revenue in the third quarter is expected to be about $90 million, with the remainder of the total or about 50% of the year expected to be recognized in the fourth quarter.

The level of revenue we're anticipating for the fourth quarter this year is not out of the ordinary based on our history. As you know, our revenue concentration is driven by various factors in any given quarter, including the timing of new technology from Cray and our key suppliers and the timing of revenue recognition on a number of large customer transactions.

Despite our lower first half gross profit margin, which includes some unanticipated items, our overall gross profit for the year is still expected to be in the mid-30% range. Note, we anticipate that non-GAAP adjusting items will have a total impact of about 1% for the year on gross profit.

Total operating expenses for the year is expected to be in the range of $160 million, which includes over $10 million in non-GAAP adjustments to our pretax earnings driven by stock-based compensation and amortization of intangibles. Other income and expenses are expected to be in the neutral to modestly positive range in 2013, mostly dependent on foreign currency fluctuations. Based on this outlook, we expect to be profitable on a GAAP and non-GAAP basis for 2013.

We expect to record an income tax benefit for 2013 as a result of the partial release of our valuation allowance in the second quarter. The GAAP tax provision remains dependent on a number of variables, including a level in geographic distribution of taxable income. A significant portion of our tax obligations for 2013 are expected to be offset by previous net operating losses and thus will not require cash disbursements. Our non-GAAP tax rate or effective cash tax rate, excluding the benefit of the partial release of the valuation allowance, is anticipated to be about 7% 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 decline in the next couple of quarters as we continue to build inventory for second half system deliveries, but expect it to rebound in the first half of 2014 following the associated collections. As usual, our cash balances are highly volatile and subject to a number of factors. We continue to view net working capital as a better measurement than cash and investments on its own, and we expect net working capital will be significantly less volatile over the coming quarters.

In summary, we had a good second quarter, and I am pleased with our position at the first half point in the year. With continued focus on good execution, we are positioned to deliver our outlook for the year.

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

Peter J. Ungaro

Thanks, Brian. Let me wrap up by giving you some perspective on what's in store for the remainder of the year. We have 3 focus areas. Our first is to achieve our revenue goal, now at $520 million for the year or more than 23% year-over-year growth. One of the main reasons for increasing our outlook today is the strength we're seeing on the commercial side of our business. And I want to note that at this revenue number, we'll likely have more than 15% of our total revenue coming from commercial customers, which is an increase of about 50% in dollars over last year and the highest percentage of revenue we've ever had from commercial customers. We now have about 85% of all the business we need in order to achieve the outlook for the year and good visibility into the rest. It's a great place to be at this point in time in the year.

Now that we've completed the Titan upgrade at Oak Ridge, we have 2 remaining development projects untapped that are key to achieving our 2013 outlook. One is the support of the next-generation Intel Xeon Ivy Bridge processors in our supercomputers, and the other is integrating accelerators into the XC30 system as we plan this for both NVIDIA GPUs as well as the Intel Xeon Phi coprocessor. We're on track to complete these development projects during the next few months, in line with our customer delivery schedules.

Our second goal for the year is to establish a stronger presence in the Big Data market, led by our offerings in high-performance storage and advanced analytics. In Storage and Data Management, a critical piece of our strategy is to expand our reach by broadening our product offering to include compatibility with systems other than Cray supercomputers. In June, we announced Cray Cluster Connect, also known as C3, a complete Lustre storage solution for x86 clusters across the HPC and Big Data computing markets. This new offering provides our customers with an end-to-end Lustre solution, either with our Cray Sonexion storage system or with storage controllers from our partners, such as DataDirect Networks and NetApp. With Cray Cluster Connect, we now offer complete storage solutions for all types of high-performance storage users.

Another benefit we're hoping to see with the broader reach of Cray Cluster Connect is the potential that over time, our revenue stream from storage will be less dependent on our large supercomputer installations. We're now actively pursuing and bidding on these types of non-Cray-attached storage opportunities and anticipate growing this side of the business over the next few quarters. In fact, we've already had our first wins for C3 in both the government and commercial sectors.

In Big Data analytics, YarcData is showing signs of real traction along their 4 target verticals as well as in some new markets, and I'm excited with the momentum we're building for the future. Each new win teaches us a lot about the system, the market and the capabilities of our offering as we're beginning to develop repeatable solutions that can be leveraged across customers.

The second half of the year is about proving the success of some of these early installations and continuing to acquire new customers. I'm very excited to be picking up another financial services customer for Urika, as well as a customer in the telco space, which isn't one of our targeted segments but shows that Urika can be used in many different markets and customer applications.

Last month, we launched our latest Big Data analytics offering, pairing the CS300 cluster supercomputer with the Intel distribution for Apache Hadoop software. This is a turnkey reliable Hadoop solution that is purpose-built for high-value Hadoop environment. I'm excited to be taking our first step into the Hadoop market as it adds a search capability alongside the discovery capability of our Urika platform, both solutions serving the fast-growing Big Data analytics market.

Our third goal for the year is to build a significant cluster solutions business. This is about making our Appro acquisition pay off for us in the marketplace. We have 3 keys to our strategy, and I want to give you an update on each of them.

First was to complete the integration of our 2 teams and extend Appro's reach by enabling the worldwide sales distribution of these cluster supercomputers. I'm happy to say that we're almost complete in this, with manufacturing being the last major integration process left to go. Our sales and support teams are fully integrated, and we're seeing good leverage going in both directions.

Second is to work with our traditional Cray customers to grow the business. We've made good progress here, and we have a number of new opportunities that we're working on and have already seen some early examples of how bringing cluster solutions to existing Cray accounts can grow our overall business. We're a little behind our revenue track at this point, but our pipeline is strong for the second half the year and into '14, so I'm confident we'll do great things in this business.

And third is to leverage our supercomputing and Big Data technologies to drive further differentiation in our cluster offerings. As I mentioned, we just announced that our CS300 cluster supercomputer is now available with Hadoop, and we're evaluating leveraging some of our traditional supercomputing technologies to bring additional differentiation to our cluster offerings.

Let me wrap up my comments by saying that while we had a solid second quarter and first half of the year, I'm even more excited about what we have in store for the second half. We have a fantastic line of products and services and strong momentum in several attractive high-growth markets. We still have work left to do in order to hit our outlook, but we have good visibility for the remainder of the year, and we're confident in our ability to secure the remaining business and execute on our game plan, as well as to position ourselves for continued growth into the future.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Chad Bennett from Craig-Hallum.

Your next question comes from the line of Glenn Hanus from Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. So first of all, maybe just a little on the numbers. Can you tell us about the, I mean, the upside in revenue for this quarter, where was that from?

Peter J. Ungaro

Glenn, I'd say for the second quarter, it was mostly in our high-end business that the -- the upside did. We got a couple of acceptances kind of in smaller systems that we were -- that we weren't expecting to complete in the quarter, as well as one cluster solution system. So a couple of extra acceptances that we got in the quarter.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. And then same sort of question for raising your guidance for the year. Maybe you could also give us that in terms of if you look across the different businesses, the HPC, the Appro, the storage, the Yarc, kind of maybe however you can sort of slice it and dice it, where you see the upside coming from? And then the third, it seems maybe there's little more back-end loaded in the fourth quarter versus what I have put out previously, but I know you hadn't given guidance on that. So any color around those questions.

Peter J. Ungaro

Okay, Glenn. So first of all, the full year numbers. So we're very excited to be able to increase our outlook for the full year, of course. I would say the majority of that is really driven off an increased view of our commercial business. And last year, we did just over 10% of our revenues in commercial. So this year, growing revenues nicely on the top line, I believe, and growing our percentage of commercial customers, we're really dramatically growing that business. One of the most exciting things for me, though, is that it's growing across each of our 4 product offerings. So we have commercial growth exceeding our expectations really in our traditional high-end HPC business. In cluster solutions, we're doing better in the commercial sector predominantly financial services there than we have been. I mentioned one of our first Cray Cluster Connect accounts was a commercial customer. And then in YarcData, we added in a couple more commercial customers. So it's really, I think, just a stronger view of that piece of our business coming along a little quicker than we expected. And that's something that's really important for us because it helps us to diversify our business over time. The mix between third quarter and fourth quarter, really it was about getting the products in that we needed to complete our system development. So predominantly, it's around the Intel Ivy Bridge processor that I mentioned. We -- that delivery of that processor pushed back a couple of deals and made our fourth quarter a little bit more loaded. But really, it's a very minor slip in the overall schedule and we feel confident -- as I mentioned, we feel confident about those -- in that development project and our ability to deliver that to our customers here later in the third quarter.

Brian C. Henry

And one other thing on that. We had previously said somewhere in the mid-40s for the fourth quarter. But just the increase of $20 million that we are now doing to our outlook adds about 4% to that. So it really wasn't a huge shift. It just happens to be more in the fourth quarter.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Great. And on the component gross margin thing that happened, I don't know if you can give us any color about it. Not so much to talk about this issue, but are there some controls or some things that you can put in place as you look forward that may mitigate the possibility of this sort of thing happening in the future?

Peter J. Ungaro

Well, Glenn, we push technology. That's what we do at Cray. That's why our customers come to us is to get on the most leading-edge technology. And we've had very few numbers of these types of issues that we had, particularly with this Oak Ridge installation. We had an issue with a connector on the machine, and it just so happens that when you do that on a system that's 200 cabinets in size, it can add up, right? And so it was one of those things where I don't think it was a major issue in our development process or in checkmarks. We've clearly done a lot of work to take a look at what could have we done better there to improve that in the future, and we've instituted a couple of things, both in the development side, as well as in our supply chain and manufacturing processes. But Glenn, I would just say that that's part of the inherent risk of pushing technology, and sometimes you get hit with these things. It is a pretty much from a financial perspective. As we mentioned, it's more or less a onetime event from a financial perspective. We don't expect this to hit us in future quarters or anything like that. So it really all was kind of accounted for in one single quarter where we didn't have high revenues in that quarter, and so the overall impact of it was pronounced.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Fine. I usually ask a question along these lines, so I'll throw it out again. If you could give us some update on your thinking about, in particular, sort of U.S. government funding issues as you look into next fiscal year, help us understand whether you're feeling more confident or more concerned about what you see going on, and then sort of the international climate as well.

Peter J. Ungaro

Okay. So in the U.S. government, pretty complex situation, as you know, going on there. It looks like as things look today, it looks like for 2014, the government fiscal year starts October 1, they are going to have to pass a continuing resolution. So it looks like we'll be in a continuing resolution right now. I'm not exactly clear about the funding level of that as Congress is trying to work all that out. But we don't currently expect any major impacts to any of the big programs that we're currently working with. It's pretty clear that right now, sequestration is going to continue, at least until they pass a real budget. And while sequestration wasn't an overall huge impact to us this year as we've talked about before, it did particularly impact our cluster solution business, specifically one project, one of our big projects within that business overall, which has gotten us a little bit lighter in that side of the business than we would normally be. But overall, I don't see sequestration as being a major, major hit to Cray from our overall businesses. Our high end and some of these Big Data projects that we're working on within the government are pretty protected. They're pretty strategic, and we haven't really seen sequestration take a bite out of those. And I will just add, there's a new Department of Energy secretary in Ernie Moniz, and we're pretty excited about Dr. Moniz taking that position because he really understands the value of supercomputing in future energy policy and such. And so I'm pretty excited about the importance of supercomputing continuing to be there within some of the major government agencies that we work within. When we look at it on a worldwide basis, the countries that we're working in, look relatively strong. We haven't seen too much weakness. I've mentioned before that in Japan, even there's a surplus going on and they're doing a stimulus program in Japan right now to try and get that economy going, which we think can have a potential positive outlook in our business most likely in 2014. And no major concerns with any of the government customers around the world that we're talking to about ongoing budgets for some of the bigger programs that we're working with them in. So I feel pretty good I guess, Glenn, to summarize, of our position there and the way the politics look like they're playing out.

Operator

Your next question comes from the line of Alex Kurtz from Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So when I look at the comment, Peter, about the 85% visibility for the rest of the year and that the increase was driven by the commercial side, which is great, is that -- I mean, when we think about fiscal '14 a little bit and where the Street is right now, which is around is 5 40, I mean, the commercial business doesn't have the same kind of lumpiness and project driven kind of elements that the government has. So could you make the argument that this sort of helps the fiscal '14 outlook? I know we're not talking about it now, but just in a theoretical sense.

Peter J. Ungaro

So that's a great question, of course, Alex, and it's something that we've been thinking about a lot. I would say clearly, as we grow the commercial accounts and the commercial sector, let's say, it's part of the overall business of Cray, I think that it starts to give us a lot more opportunity to be more consistent overall and to grow in a lot of different places. It really helps to diversify us more broadly. So we're diversifying from a perspective of our product offerings, not just in the high end of supercomputing, but in clusters, in Big Data, storage and analytics, but also in our customer base. And so, what gives me the most positive feelings toward the momentum that we're building in the market right now is that broader distribution and diversification of our overall business, and commercial is a big part of that. So I couldn't be more excited about raising our outlook because of that piece coming through for us.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So did you say 15% -- 15% growth or 15% contribution from commercial in '13?

Peter J. Ungaro

15% -- so commercial should be over 15% of our total revenues. So over 15% of our $520 million number assuming we hit the target that we set out for ourselves.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

I guess what I'm getting at is, you wouldn't expect to have a step back in contribution next year?

Peter J. Ungaro

No. It's -- we're not giving any outlook into next year. Of course, it's way too early for that, Alex. I'm hopeful that we're able to grow. Last year, we talked about getting over 10% of our business in commercial. This year, on a growing revenue basis, we're getting -- we should get over 15% of our business in commercial. So I'm hopeful that we can continue to grow that, and that would be a great outcome for our business.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And then just back on the continuing resolution comment. I mean, in a perverse way, Peter, doesn't the continuing resolution sort of has a positive outcome probably because that's sort of no change to sort of funding levels, right, for what you guys are doing?

Peter J. Ungaro

Yes, we're pretty confident in working in a continuing resolution because we have ongoing projects, and so -- and they've been appropriately funded. So we feel good about that. That's a fine outcome for us. I mean, ultimately, we'd love to get where the government locks down and we get kind of out of sequestration and we get a straightforward budget. But we can work in continuing resolutions for a while and still execute nicely in our business.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And then just last question for me, the remaining 15% guidance for the -- for you guys to make your number for the year, just give a little more detail -- or I missed it earlier, are there specific deals that you have pretty good visibility that just haven't crossed the -- a certain threshold yet? Or is it turns business? Sort of what makes up that 15% again?

Peter J. Ungaro

Yes, as I mentioned, Alex, we have good visibility to that -- the remaining 15% there. I would say a majority of it is in a couple of larger deals. And so we feel pretty confident about getting those over the finish line or the goal line here by the end of the year and getting them completed. So it's pretty straightforward for us, and what we've got in front of us to get to that number. Now really it's about execution and getting it all completed by December 31.

Operator

Your next question comes from the line of Joe Fadgen from Craig-Hallum.

Joseph Fadgen

On here for Chad today. So I want to go back to that 85% thing and, I mean, I guess when you're looking at 85% visibility into the year and even -- I know you haven't gone into fiscal '14 yet, but thinking just maybe even qualitatively. I mean, would you say that you have kind of more visibility going into the back half of this year and into next year than you would typically have? Or is this kind of about on par for what you guys have seen over the last few years?

Peter J. Ungaro

Yes, Joe, great question. I feel like it's about where we are. I mean, it's on par more or less. I would say the positive of it, though, is it's -- as I was mentioning to Alex, it's much more diversified revenue than we've ever had before. And it's across a broader number of segments and products, which gives me a lot of confidence in having a lot more opportunity to continue to grow that -- our business and build on the momentum that we've already built. So I feel like from an absolute number, that it's about where we normally would expect to be at this point in time. It's a very achievable number. We can kind of get there. But the big difference, I would say, right now is that it's just diversified a lot more than it has been in years past. And I think that's positive for not just this year, but as we look forward into '14 and beyond.

Joseph Fadgen

Okay. And then shifting over to kind of Big Data. It sounds like some pretty exciting things going on there. You mentioned that you've got new -- some customers lining up in some verticals that maybe you hadn't targeted initially. I think you mentioned telco. When it comes to something like that, is that like -- did a telco customer come to you and kind of ask you like, "Hey, we think you've got a really interesting thing here. We'd like to see how we can apply it to what we have." Or is that kind of more you pushing into those verticals? I guess, like, how are those kind of new verticals, those new customers meeting up with you? Are they coming to you? Are you going to them? Or any color on that?

Peter J. Ungaro

Yes, great question, Joe. I think that the way I would say this is we've done, I think, a pretty good job of starting to be able to better explain how to take advantage of data discovery. And where that fits in this broader analytics solution in this Big Data world. And so as we started to do that, we have an initiative inside the company to start looking at some different verticals and do some new things. You might have noticed that we had, for instance, a contest where we had people come in and give us different solutions and different verticals, for instance, and really try to look at where best to apply this. But part of it is, I think, us looking at some new verticals and just exploring that, not as a major focus for us, but just as we start to think about how this business can expand over a 2- or 3-year time period. And part of it is customers coming to us, whether they've seen it in a conference or they just read about it in one of the articles, or we've got an amazing pick up from some of the analysts organizations like Gartner and IDC and Bloor and such. So it's really been a little bit of both. So I guess it's a little bit of push, a little bit of pull in that front. And you were right, by the way, with the telco customer was our kind of unusual customer in the last few months.

Joseph Fadgen

Okay. And then last one, real quickly. The Hadoop solutions, can you remind me what kind of margins does that segment carry? And I forgot if you've kind of laid out your expectations for either revenue contribution or growth rates for the rest of this year?

Peter J. Ungaro

Yes, so our Hadoop solution is on our CS300 platform. So this is the cluster supercomputers that we have. I would say it's too early to call. We don't have a lot built into our 2013 forecast around our Hadoop solutions, and we keep on playing them out. We do think that there's an opportunity, as we've seen this market, to generate higher gross margin than are typical in those businesses that we're just selling the base platform. So as we're kind of packaging it into a turnkey solution, we think that there's an opportunity to get a little bit better margins in there. But we don't really have any expectations that that's significant or material into our 2013 plans right now. That's going to be something that we're going to be really thinking about as we move into '14. That's a solution we've just announced, and we're not going to be shipping it until the third quarter. And so it's really something for us to be building on more as we start moving through the end of the year and into '14 and beyond.

Operator

Your next question comes from the line of Chad Bennett from Craig-Hallum.

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

I'll ask 2 in a row. So hopping back and forth a little bit. Pete, can you talk about the pipeline -- and sorry if it's redundant, but the pipeline for the second half of the year, particularly in your core -- I mean, your existing HPC business? And give us kind of the lay of the land geographically of where large procurements are as much as you can, and what you hope, at least, to have from a visibility standpoint by the end of this year into next without telling us what next year will be.

Peter J. Ungaro

All right, Chad. I'll take that one on. Yes, so first of all, I'd say our pipeline overall continues to grow. I feel really good. As we started to add in more into the sales and go-to-market side of our business, which we hadn't done in quite a while, we're starting to see that paying off in the pipeline. And that's really important because if we're going to try to stay on this kind of a growth path as we go forward over a period of years, we need to be able to build that pipeline and continue to build that up. And I'm also pretty happy to say that, that pipeline is building up pretty nicely across our different product offerings and across our geos. I mean, you saw 2 huge announcements, 2 of the biggest supercomputing deals that were going on over the last few months -- few quarters, I should say, have been these 2 in Europe that we've just announced that we won both of them: one in ARCHER, the follow-on to HECToR in the U.K., as well as ECMWF, which is one of the premiere numerical weather institutions in the world. So I feel really good about what's going on in our European business, winning some really large customers, and that business has really started to grow very nicely. When I look over in AP, across the broad AP region, I see our pipeline growing nicely there. We -- our big challenge there is converting a higher number of those opportunities. Our win rates in Asia Pacific have been lower than they have been in U.S. and Europe. And so that's something that we continue to really focus on. I think overall with Cascade -- or our XC30 product being out in the market right now, it's really showing to be very highly differentiated in the market, and our teams are very excited about what they see in opportunity and potential conversion of that opportunity into deals overall. And then lastly, of course, here in North America, again, continued pipeline growth. There is some larger deals that are out there, but they're actually quite far out. So they're procurements that are starting up, especially within the Department of Energy this year, but they're persistent deliveries that are quite far out, very large systems but quite far out deliveries. So I would say we see a much more balanced portfolio in the U.S. of smaller deals, closer in and then some larger deals a little further out over all. Hopefully that answers it. If you need -- if I didn't pick up part of that, just redirect me there.

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

No, that's good. And then on the storage side of the business, anything new on the competitive front there? And maybe this has been asked, but what has been your success rate of selling Sonexion outside of your core products, your core supercomputer products?

Peter J. Ungaro

So storage had a pretty good quarter, lighter on the revenue side, but some really big wins. And then of course, the thing that's got me the most excited for our future is the Cray Cluster Connect offering, right, because that's going to help us to address this broader, high-performance storage market, both in HPC and Big Data. The -- I really don't see any major changes in the competitive landscape in storage over the last quarter or 2. I think things are kind of along the lines that they have been, and we feel pretty confident in our ability to compete in that type of environment. I was pretty excited that both of our big supercomputer wins also came with Sonexion storage directly attached. So that was a -- that's a nice opportunity for us, and it gives us a nice basis to continue to grow that business overall. But I feel like our storage business is starting to really become meaningful for us and gives us the opportunity. Although it's still going to be up and down, Chad, until we build our non-Cray-attached storage business to be a bigger part of our overall storage revenue attainment every quarter because otherwise, it's pretty much attached to Cray systems. I did mention -- one last thing on that, I did mention that we have gotten our first customers. We've gotten both customers in our government segments, as well as a commercial customer, one of our initial beta sites actually that came through for us in Cray Cluster Connect. So I feel like we're off to a good start, but it's something that's very tiny today, so we got to grow it up to be material to the business overall.

Operator

[Operator Instructions] Your next question comes from the line of Glenn Hanus from Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Just to follow up some more. I mean, I know competitively, you've been pretty positive related to IBM recently. Could you comment on whether that -- if there's any sort of change there? And your -- in Europe in particular, some of these recent wins, are these some competitive displacements? Maybe you could comment on how you're doing sort of from a competitive displacement standpoint as well?

Peter J. Ungaro

Sure, Glenn. So on the competitive front -- Glenn, just to be clear, you're talking about mostly our high-end business, right?

Glenn Hanus - Needham & Company, LLC, Research Division

Yes, yes, in the core business.

Peter J. Ungaro

Yes, so in that business competitively, we feel like we have a great product. I mean, as I've mentioned in past calls, the XC30 was the largest R&D project we had ever done as a company, and we feel we've built something that's very differentiated out in the market and a lot of our strength is coming from that product itself. So as we're getting these other businesses going like in storage and analytics and such, our core business is also doing well at the same time, which is just a great place to be from an overall company standpoint. And so no major changes really from our competitors, no new products that have been brought out over the past, even across the first half of the year that have been major changes to the competitive environment that we've been working in, in the high end, and we feel good about that. You asked specifically about the 2 European wins. The HECToR win -- well, the ARCHER win, excuse me, was a follow-on to our HECToR system. So that was one that was a Cray system that we continued on. I mentioned in my comments that, that was the first time in that program and 5x of them running those procurement that the same vendor won twice in a row. So we feel really great about that. And ECMWF has been a pretty long time IBM account. So we were able to win a pretty important account in both the weather community and from one of our toughest competitors. So that was a nice win for us overall.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. And more broadly, displacements, you feel like you're making some market share gains in effect?

Peter J. Ungaro

Yes, there's no doubt we're making some market share gains. We're doing it in really -- really across the board from a geographic basis. I think we've done a great job of where a customer has a Cray machine of continuing them in the Cray family. So we've done a great job of continuing to convert our existing base into the next generation. But more importantly, we've also been able to take a few new accounts, and we've done that kind of across the board from a number of competitors. So I feel good about that in being able to grow our overall business because in order to grow, we have to be able to do that, right? And not just grow our base, but also win competitive accounts. And over the past, I would say, couple of quarters, we've got a pretty good track record there.

Glenn Hanus - Needham & Company, LLC, Research Division

Do you have any AMD dependencies coming up?

Peter J. Ungaro

Not as a major piece of the forecast. We, of course, still have AMD in both the XE6 and XK7 product line. Our cluster solutions team delivers AMD-based clusters as well as Intel-based clusters. So we still have a great relationship with AMD, but nothing that's really -- we're not really expecting too much in next generation to be material to what we need to do for 2013. So no major dependency there, Glenn.

Brian C. Henry

We do have some opportunities, though.

Glenn Hanus - Needham & Company, LLC, Research Division

And then lastly, maybe more broadly on your own product development front. Could you comment generally about milestones that you might have to hit for next year as we start to think about not only the pipeline for next year but sort of core Cray execution criteria and partner-supplier delivery requirements as we think about that side of the business through next year?

Peter J. Ungaro

Sure. So first of all, on the R&D front, the biggest thing that's on our plate is getting this next generation of Intel Xeon Ivy Bridge processors in our systems and shipping out. That is key to us to achieving the year that we have, and I mentioned that that's on track. As well as having support for both the NVIDIA GPU and the Intel Xeon Phi coprocessor within our XC product line. So those are really the big things that's on track, and that should happen here in the second half and then be leverageable into 2014. So most of that development work will all be completed in 2013. More of the revenue generated from that will be, hopefully, into 2013 and '14. But as we look forward into -- further into '14, a little bit less dependencies in other generation of Intel product line. They pretty much bring out something every year, and we'll be keeping on that pace, likely another offering from NVIDIA, the same way. We pretty much architected the systems to be able to continue to follow the road maps of all the major processors that are out there and accelerators. So I feel like we'll continue to have that. But there's no more major dependencies outside of what we got right in front of us right now outside of, again, this next generation of Intel processor, which will happen probably towards the end of next year.

Operator

And there are no questions at this time. I turn the call back over to the presenters.

Peter J. Ungaro

Thank you. I'm pleased with how things are shaping up for 2013, and our competitive position across both supercomputing and Big Data is strong and we're gaining momentum in the market. We're positioned to have a solid year and continued success going forward. So I just want to thank you all for joining the call today and for your continued support of Cray. Have a great evening.

Operator

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

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Cray (CRAY): Q2 EPS of -$0.19 beats by $0.01. Revenue of $84.5M beats by $4.75M. (PR)