Cray Inc.: Room For Further Growth

| About: Cray Inc (CRAY)

Cray Inc. (NASDAQ:CRAY) operates in the Diversified Computer Systems industry and has made a name for itself in the world of supercomputing. The company provides advanced computing systems, solutions, services and support to various clients including government, industry and educational institutions. When you think about supercomputers, then you are surely thinking about Cray Inc.

The company's computing systems and storage solutions come with a high level of sustained performance and reliability on various applications. Cray, founded in 1972 with its headquarter in Seattle, Washington, merged with Silicon Graphics, Inc. in 1996 and was finally acquired from Silicon by Tera Computer Company in 2000.

Currently trading at $27.91, the company's shares surged up to 20% at the high and 17% at the low last week with the release of the company's second quarter fiscal 2013 earnings report. Cray reported a better-than-expected revenue of $84.5 million which exceeds analyst estimates of $79.8 million. It reported a net loss of $0.19 per share which was a penny below the analyst estimate of $0.20.

With management's ego boosted by the result, it wasted no time in raising the company's full-year revenue outlook from the initial $500 million to $520 million. In terms of GAAP and non-GAAP measures for fiscal 2013, the company expects to be profitable. I should say this is an interesting outlook for investors.

The report also showed that the company's gross margin fell by 900 basis points YoY to stand at 32% with the service segment being more profitable than the product segment. The product segment's gross margin of 24%, which was as a result of a higher than expected costs on a single, large installation was blamed for the decrease in gross margin. The service segment reported gross margin of 54%.

There was also an increase in the company's operating expenses which rose from $22.1 million reported in the same quarter of the previous year to $36.6 million for second quarter of 2013, a 66% increase from the same quarter a year ago. This increase is attributed to the company's $15 million previous year's R&D credit. For cash and equivalents, it was a slight raise from $251 million reported in the same quarter of the previous year to $253 million for the second quarter of 2013.

It would also interest investors to know that presently Cray has some contracts in the pipeline which are expected to boost the company's revenue in the remaining two quarters of fiscal 2013. One good reason why the company hopefully raised its full-year outlook is based on the fact that a higher percentage of its full-year revenue usually comes in within the fourth quarter and with the already better than expected earnings recorded in the second quarter it could actually get better as the year progresses.

For one, the company has recorded major purchases by the European Center for Medium-Range Weather Forecasts. There are also purchases made by the ARCHER project in the UK. Add these to the recent launch of the Cray Cluster Connect offering and the Urika real-time data discovery platform project under Cray's YarcData and you know management has a good reason for raising its full-year outlook as these projects are sure to drive the company's YoY top line growth to 20% for 2013.

On July 25, 2013, Cray announced a $30 million contract awarded to the company by Engineering and Physical Sciences Research Council (EPSRC). This contract entails Cray delivering a Cray XC30 supercomputer and a Cray Sonexion storage system to the University of Edinburgh which is related to the ARCHER project.

However, after the feverish rally on the company's stock after the earnings release, the stock fell 4% the following day before it picked up the tempo again. Some analysts believe that the company's stock is currently overvalued which could lead to sluggish growth in the future and the drop in price points to the fact that some investors noticed that too. But then I have every reason to believe that Cray has a lot of growth potential ahead of it, more beneficial to those who are smart enough to own the company's shares now.

Growth potential

Cray's management is one that is dedicated to calculated growth moves. Knowing that it operates in an industry which is bound to explode with demands for its products and services in the near future, the company is doing all it takes to sustain the already competitive position it maintains.

Not being a company to be limited by "the sky is our limit" phrase, Cray aims more than the sky. This is evident in its target growth rate of 15% when there is a 7% and at most, 8% forecasted growth rate for the industry. Wondering how the management plans to achieve this feat? Not to wonder.

The company's management has set up a strategy in which growth is expected to come from three angles: acquisitions, cost-cutting and more product offerings. Now, looking back at the company's acquisition of Appro International, Inc. last year, I would say $21.8 million is a fair price for an expansion into the HPC market which will over the years positively impact the company's global sales.

In the area of cost-cutting, it could be recalled that the networking assets purchase agreement Cray entered into with Intel Corporation (NASDAQ:INTC) in the second quarter of the previous year, worth approximately $140 million in cash, was not just to boost Cray's balance sheet. With Intel purchasing those assets and a good number of Cray's staff moving over to Intel, the lesser headcount means less operational expenses for Cray.

In terms of increased product offerings, much of this was done in the previous year with returns expected this year, 2013. With the company's recent mix of product lines and the potential it holds for it and investors, there is more than enough room for further growth.

Finally, the fact that Cray was rated among the top four companies in the Diversified Computer Systems industry with the highest ROA based on ttm basis shows how profitable the company is and will continue to be.


The industry Cray operates in is one that is highly competitive. This is especially glaring when you consider that giants like International Business Machines (NYSE:IBM) and Dell (NASDAQ:DELL) are also making waves with their own products and services and huge lists of customers. This means that in order to be seen and its footprint noticed, the company had to carry out cash-consuming marketing operations.

Another headwind is the limited number of projects the company relies on in order to rake in revenues. This points to the fact that with the slightest change in its limited customers' demands or loss of any of the customers, it is sure to have a negative impact on the company's operational earnings.


I have already mentioned that Cray competes with giants which include IBM, a very strong company with management competent enough to understand that it can sustain the company's growth by opting for decreased cost of operations, robust share buybacks and a shift in products and service offerings. IBM, in mid 2012, has had its Sequoia supercomputer rated as the fastest supercomputer in the world.

The other strong competitor is the titan DELL. Although things are not all rosy for this giant as a result of the recent proposed buyout of the firm, that does not mean it has lost its footing in the Diversified Computer Systems industry. It is only a matter of time before the drama comes to an end and investors know where they actually stand: Carl Icahn's platform or Michael Dell's platform. However, I firmly believe Microsoft's (NASDAQ:MSFT) offer of a $2 billion loan to the company in order to facilitate its buyout is a little worrying because I know where Microsoft is headed. This is especially considering the company's history with Nokia (NYSE:NOK) which at the end of the day I still believe did not do anything to boost Nokia's position in the industry it operates in.


Even though Cray's stock fell 4% the day after its 20% surge, considering the fact that the stock has maintained over 140% growth YoY, there is a lot of growth potential for this stock. With the company's pipeline contracts and expansion into a high paying market, added to its 12 months stock growth trend, I would say it is climbing its way toward a strong top and bottom line growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.