Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John Swenson

Jorge Luis Titinger - Chief Executive Officer, President and Director

Robert J. Nikl - Chief Financial Officer and Executive Vice President

Analysts

Mark Kelleher - Dougherty & Company LLC, Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Shebly Seyrafi - FBN Securities, Inc., Research Division

Michael Lawrence Shinnick - Wasatch Advisors Inc.

Silicon Graphics International (SGI) Q4 2013 Earnings Call August 7, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Silicon Graphics International Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to your host, John Swenson with SGI. You may begin.

John Swenson

Thank you, Stephanie, and good afternoon, everyone. I'm John Swenson, Vice President of Investor Relations and Treasurer for SGI. Welcome to our fourth quarter and fiscal year 2013 conference call for the period ended June 28, 2013. Joining me on today's call are Jorge Titinger, SGI's CEO; and Bob Nikl, CFO.

Today's press release is available on the Investor Relations section of our website at investors.sgi.com. This call is being webcast, and a replay of the webcast will be available on our website 2 hours after the conclusion of the call and will remain available until the next earnings call.

Please note the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today's conference call includes forward-looking statements, including financial projections for our next fiscal quarter as well as fiscal 2014, growth expectations for certain products and various operational and product development plans. There can be no assurance that we will achieve our financial objectives, and we ask you to refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these forward-looking statements. All statements made in this conference call are made only as of today's date. SGI undertakes no obligation to update information in this conference call, whether as a result of new information, future events or otherwise. To obtain copies of our latest SEC filings, please visit sec.gov or our website.

Also during today's call, we will make references to several non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release, which, again, is posted on our website.

Now to our conference call. Jorge will provide some highlights of the company's financial performance for the fourth quarter and for the full fiscal year, as well as an update on the business outlook. Bob will give further detail on the Q4 and fiscal year 2013 results and financial guidance for the first quarter of fiscal 2014. We'll then take your questions.

With that, I'd like to turn the call over to Jorge Titinger, SGI's CEO. Jorge?

Jorge Luis Titinger

Thank you, John, and good afternoon to all of you. I want to provide you with some additional color on the fourth quarter and the past year, and then I'll provide an update on our thoughts for fiscal year 2014.

The fourth quarter capped a year of significant success and positive change for SGI. A year ago, we talked about implementing the first phase of our turnaround, which involved improving deal quality, delivering and not repeating the low-margin deals, enhancing profitability and organically growing cash. We also talked about strategically refocusing the company to take advantage of our growing opportunities in Big Data, Storage and HPC.

I am pleased to report that in FY '13, we met or exceeded all of the goals we set for the year. We tripled non-GAAP net income and EPS for the year; we nearly doubled the net cash balance, ending the year at $179 million with no debt; and most importantly, we made significant progress in repositioning the company to grow in our most profitable core markets in FY '14.

For the fourth quarter specifically, revenue and net income were within the guidance ranges that we established on our last earnings call. While revenue was at the low end of the range, primarily due to the pushout of one large project, gross margin performance and better operating expenses put us near the midpoint of our earnings guidance on a pretax basis. Our year-end tax true-up provided an additional $0.03 to EPS for the quarter and the year.

For the full fiscal year, we achieved a non-GAAP operating margin of 2% and EPS of $0.36, with essentially all of that profitability driven by our performance in the second half of the year. Although overall revenue was close to flat, our core Federal business was up 19% for the year. This growth was offset primarily by weakness in Japan, which was down 24% for the year.

We are extremely pleased with the performance of our Federal business in FY '13. We achieved a number of notable wins across the Federal space, including continued success as the preferred supercomputer solution provider for NASA and ongoing business with core accounts in defense, earth sciences and life sciences. We have been selected over the incumbent competitor to partner on a major new government-funded research project in a new branch of the Federal space. We also booked and delivered several very large Hadoop deals totaling tens of thousands of nodes for our major intelligence account, which continues to be our strongest segment within Federal. We believe the solid growth in Federal last year reflects a meaningful increase in market share for SGI, and we have been investing in the Federal business to drive additional growth and market share gains in fiscal 2014.

Federal represented 39% of our total revenue in FY '13, up from 33% in FY '12. Our strategy in Federal is to go deeper with current accounts and to go wider into new services and agencies where we can -- we are now being invited to compete. Given our opportunities in Federal, we believe that in FY '14, it could exceed FY '13 as a percentage of revenue. But at the same time, we expect to be more diversified, serving a broader base of government, research and higher education accounts with a richer mix of missions from intelligence and homeland security to weather forecasting, genomics and fraud detection.

In fiscal 2013, revenue with our largest legacy cloud customer was up year-on-year to $139 million, equal to 18% of total revenue. This significantly exceeded our expectations entering the year, reflecting a high rate of demand growth for this particular customer. While the top line achievement was positive, continuing to grow in this segment requires committing to an aggressive cost-down trajectory that is increasingly unattractive. Our strategic focus is to invest in verticals where we can provide differentiated value that commands gross margins in line with our business model and to pull away from market segments that are commoditizing. We therefore are planning on significantly lower revenue in the public cloud infrastructure going forward. However, we expect to more than offset the margin contribution of this segment with growth from higher-margin products and verticals.

As you begin to deconstruct the size and composition of our various lines of business in FY '13, what you have is an HPC, Storage and Big Data product business of approximately $400 million, with related services of $150 million to $175 million. This would sum to an enterprise with revenue of approximately $550 million to $575 million, which we expect to grow by at least 15% in the current year. You add to this an infrastructure and integration business comprised of commodity servers and third-party products with revenue of approximately $200 million, which will likely decline in the coming year as a result of our strategic focus on differentiated, high-margin businesses.

Now I would like to shift the discussion to fiscal year 2014 and how we view the growth story for the core business in the context of both market opportunities and our go-to-market strategy. There are 3 important themes for the year. The first is that we expect solid double-digit market growth in our core markets of HPC, Storage and Big Data. Second is that we have a strong suite of products and go-to-market strategy aligned with these growing opportunities, which we expect will drive share gains and above-market growth in our target segments. And third is our continuing attention to operational excellence, as we believe that customer responsiveness, operating margins and cash flow are critical positive differentiators for the new SGI.

Regarding the first theme, market growth, we believe that our overall addressable market opportunity in HPC, Storage and Big Data is growing at a blended rate of 10% to 15%. We expect to gain share in these markets and, therefore, expect to deliver even higher revenue growth from our core solutions. As I mentioned, we expect continuing price pressure to limit revenue growth in the commodity server market. This is why we're concentrating our resources on more value-added solutions while managing the runoff of lower-margin opportunities in the public cloud and data center infrastructure.

Geographically, we believe that demand for core HPC in Europe bottomed last year and is now beginning to recover. We see the same in parts of Asia Pacific, such as Australia, which has traditionally been a strong market for SGI. In the U.S., we believe that commercial demand for HPC, Storage and Big Data will also show solid growth. As we have discussed previously, we expect that the U.S. government will continue to increase IT budgets for mission-critical projects, which is primarily where we are deployed. However, due to sequestration and the inability of Congress to pass a formal budget, we believe that the timing of discrete IT projects will again be challenging to predict with certainty. Going forward, we currently expect to see funding through continuing resolutions, which would represent the same decision-making framework that has existed for the past year. This gives us confidence in our ongoing market share gain in Federal, although calendarization of revenue timing will always be a little lumpy.

Second, we have made significant progress on our strategic initiatives to refocus the company on key vertical markets and horizontal solutions. We entered fiscal 2014 with new products for storage, new configurations for our Rackable, ICE X, and UV Compute platforms and a portfolio of software partners who are beginning to contribute to pipeline and revenue growth. We have learned that our UV platform is highly differentiated in Big Data applications in the enterprise in areas that leverage pervasive trends in the industry. For example, according to Gartner, IT budgets have declined or been flat each of the past 5 years. Historically, when IT budgets stop growing, IT buying behavior changes. One of the buying behaviors that is changing is enterprise customers' desire to save money through open-source software. Several customers and prospects are talking with us about UV as a virtualized, open-source application development platform. The synergy between virtualization and the management benefits of our in-memory technology provide a significant total cost of ownership savings for these customers. We also continue to make inroads with UV as a platform for data ingest, graph analytics and visualization. We have a $200 million pipeline for UV and currently expect our UV revenue to grow significantly in FY '14.

In storage, we are achieving rapid market acceptance of our new products. We have received multiple initial orders for our new InfiniteStorage Gateway and expect to ship to these initial customers in the current quarter. This is a very rapid commercialization for a product that was just launched in April of this year. As we said on the last call, we believe that the Gateway is a game-changing product for active archive and Big Data environments, and we expect it to make a meaningful contribution to revenue in the second half of our fiscal year. In storage, we also won our first deal through Scality, our partner for software-defined storage. The customer engagement model with Scality is working extremely well, and we believe they are an excellent partner for jointly pursuing this fast-growing market segment.

In Big Data, we're a dominant provider of very large production Hadoop nodes. We have installed tens of thousands of nodes globally, including some of the largest production Hadoop clusters in the world. And we recently achieved a new record on a key industry benchmark with Cloudera. We expect to continue to be among the leaders in Hadoop, with a new higher-performance cluster on track to launch this fall, new high-performance reference architecture for leading partners and good success with our Hadoop starter kit. We expect to announce an additional Hadoop partner this fall, as well as new partners in data ingest, analytics and visualization.

ICE X represents another compelling growth opportunity for SGI in fiscal 2014. ICE X already has won credit as the most powerful commercial supercomputer in the world: the Pangea system at Total in France, which also is rated #1 in the world for energy efficiency. Our ICE product line also enjoys the top spot as the largest multigenerational supercomputer system, the Pleiades system at NASA Ames, which ranks #19 in the world and spans 4 generations of ICE.

ICE X was a $100 million product line for us in FY '13. Based on the lessons learned last year and the positive technical momentum, we expect to grow ICE X revenues by at least 20% in fiscal 2014, with much of that growth coming from large deals that would revenue in the second half of the fiscal year. We have a strong start on the year, having booked a large ICE X order from NASA in Q4 and winning a very large deal in Europe in July.

Third, we have continued opportunities to enhance operational efficiency and cost, most notably through our contract manufacturing initiative but also through consolidation of additional legal entities and the realization of a full year of savings from our restructuring activities. We expect to finalize a definitive supply agreement with Jabil by the end of the current quarter and, soon thereafter, to transition to a manage-in-place [ph] supply model. Over time, we anticipate that Jabil will enable improved responsiveness to customers, faster cycle times for both long lead and short lead time products, enhanced quality and reduced costs. One outcome of this is the ability to handle greater volumes of turns business and to ramp to higher volume without additional capital investments or increases in fixed costs.

In summary, we exceeded our internal expectations for fiscal 2013 and have positioned the company for continued success in the current year. We are very enthusiastic about the growth prospects of our core business in HPC, Storage and Big Data along with related services, which we believe will grow at least 15% in fiscal 2014. At the same time, we are managing the decline of the legacy infrastructure business, which will help to drive positive change in our product mix and margin profile. We are looking forward to driving even better financial performance in fiscal 2014.

With that, let me turn the call over to Bob Nikl. Bob?

Robert J. Nikl

Thanks, Jorge. I'll start by discussing both our fourth quarter as well as full year financial performance and then provide the company's guidance for the first quarter of fiscal 2014.

Please note that many of the figures I reference will be non-GAAP measures, which typically exclude restructuring and severance charges, stock-based compensation expense, amortization of intangibles and other nonrecurring items. A full reconciliation to our GAAP financial results is provided in our press release.

Fourth quarter revenue of $171 million was down 27% from the prior quarter and down 5% from the year-ago period. As a reminder, we recognized the last 2 remaining low-margin deals, totaling approximately $50 million, in the third quarter, and approximately $15 million of LMDs in the year-ago quarter.

Products represented 76% of total revenue for the quarter, with Compute accounting for 86% while Storage was 14% compared to an 89%-11% split in the prior quarter.

In our market segments, the public sector was approximately 52% of total revenue, while the cloud segment accounted for 27%. All of the commercial was 21%. Domestic revenue was 68% of total, while international was 32%. This compares with a 59%-41% split in Q3. Approximately 88% of revenue came from direct sales, while 12% was from systems integrators and other channel partners. And during the quarter, we had 2 customers representing greater than 10% of revenue.

Our non-GAAP gross margin was 28.4%, up over 5 points from 22.9% in the previous quarter, which, again, included the $50 million of LMDs. On a like-for-like basis, excluding these LMDs, our fourth quarter gross margin was fairly consistent with fiscal Q3, as well as our fiscal Q2.

Non-GAAP operating expenses in the quarter were $43 million, a decrease of $3 million from the prior quarter.

While our R&D spend was essentially flat at $15 million quarter-on-quarter, SG&A expenses benefited primarily from workforce rebalancing initiatives, as well as tight expense management.

Our worldwide headcount at year end was 1,410, including full-time and temporary employees. This represents a reduction of approximately 11% since the start of the fiscal year.

Net loss for the fourth quarter on a GAAP basis was $0.13 per share. Our non-GAAP net income was $0.17 per share and excludes approximately $7 million of restructuring and severance charges, as well as stock-based compensation expense and the amortization of intangibles. Both the GAAP and non-GAAP EPS amounts include the impact of $0.03 of benefit related to the year-end true-up of the tax provision.

In fiscal 2013, we reduced non-GAAP operating expenses by approximately $20 million, or more than 10%.

Our non-GAAP net income for the year was $12 million or $0.36 per share, compared with non-GAAP net income of $4 million or $0.12 per share in fiscal year 2012.

Now some brief comments on the balance sheet. Ending cash was $179 million, up $26 million from last quarter. The strong cash position was driven by very favorable collection activity in the quarter, which resulted in a DSO of only 32 days. We would expect DSO to normalize back to 40 to 45 days in the September quarter.

During the quarter, we repurchased approximately 165,000 shares of stock at an average cost of $13.96 per share. Under the current $15 million buyback authorization announced in January of this year, we have now repurchased approximately 200,000 shares at a total cost of $2.8 million or roughly 20% of the total authorization.

EBITDA for the quarter was $8 million, while our full year EBITDA was $23 million, or an increase of $9 million year-over-year.

Capital expenditures in Q4 were $1 million, while depreciation and amortization expense was $4 million. Both items were essentially unchanged from last quarter.

Before I discuss guidance for Q1, I want to provide our current perspective on the full fiscal year 2014. Working off of our fiscal '13 non-LMD baseline of approximately $700 million of revenue, we currently expect growth in the range of 8% to 10% for the year. Revenue will be back-end loaded in the second half based on the timing of several large deals as well as the ramp of our new storage products. As Jorge mentioned, there is a blended growth story next year, reflecting significant above-market growth for our core HPC, Big Data and storage solutions, offset by expected declines in certain legacy infrastructure business.

We expect to begin working with Jabil as our primary manufacturing services partner within the next couple of months. Our implementation timeline is approximately 18 to 24 months, with cost savings anticipated as Jabil takes on more of the supply chain in the later phases of implementation.

Based on our current internal plans, our objective is to deliver at least $1 per share of earnings on a non-GAAP basis for the fiscal year. Due to the back-end-loaded revenue profile, more of the earnings power, understandably, will be generated in the second half.

Our gross margins are expected to range from 27% to 29% during the upcoming fiscal year. And we are currently planning to reduce total operating expenses by another 5% year-over-year, in addition to FY '13's more than 10% reduction.

Based on an assessment of our current tax assumptions, we are currently modeling a 5% to 8% tax rate for the year.

In addition to our normally recurring capital expenditures, we expect during fiscal 2014 to begin an upgrade to some of our internal IT systems, which we expect will improve productivity and facilitate opportunities for additional future cost savings. We currently expect the capital budget for this upgrade to be in the range of $10 million to $15 million for this year.

As previously announced, we recently signed a lease for a new headquarters facility, which substantially reduces our current footprint and will enable us to achieve approximately $500,000 of annualized savings. We plan to take occupancy at the end of this calendar year, consistent with the expiration of leases on our current headquarters facilities.

Now to our guidance for the first fiscal quarter, ending in September. Revenue for the first fiscal quarter is expected to be between $160 million and $170 million. This reflects a significant sequential decline in legacy cloud infrastructure, largely offset by sequential growth in our other segments.

Non-GAAP net income per diluted share for the first fiscal quarter is expected to be $0.07 to $0.14.

Our GAAP net loss for the quarter is expected to be $0.07 to $0.14 per share and includes $4 million of stock-based compensation expense, $2 million of restructuring and severance costs and $1 million of intangibles amortization.

In summary, we were pleased with the operating results for fiscal 2013 and particularly with our financial performance in the second half. We believe we have established the right target margin and operating expense profile to manage through this volume drop in some of our weaker-margin business, as evidenced by our continued profitability even at these levels. Based on our current view, this profile puts us very much on track to achieve our profit targets for the year.

With that, I'll turn the call over to the operator to open the line for your questions. Stephanie?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Kelleher with Dougherty and Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

Just a couple of things. First of all, you mentioned that there was a large deal that was pushed out of the quarter. Was that pushed into the September quarter or beyond the September quarter?

Jorge Luis Titinger

Into the September quarter.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. So that kind of leads me to guidance. Kind of a step-down. Can you kind of size up the public cloud ramp-down? Can you give us some specifics around that? Is it your choice to wind this down? Is it the customer moving away? Is it a strategic move on your part, and can you size it? How much of your revenue is going away? Is it going away suddenly? Or does it peter out through the year?

Jorge Luis Titinger

Sure, Mark. So this is -- as we talked about this before, without referring specifically to a customer, but in that sector, these are businesses with margins that are fairly low, and in the -- the objective, I think, from these customers to essentially do business with CM kind of companies, right, at those kind of margin levels. So the continued pressure on cost-down at the volume levels that we were at made this business fairly unattractive for us. The decline in sequential business for this quarter is somewhere in the -- potentially, somewhere in the $25 million to $30 million, right? And so, we are replacing most of that with growth in other markets and other businesses to where our high end of our guidance is very similar to what we did in Q4.

Mark Kelleher - Dougherty & Company LLC, Research Division

Last year, you had a fairly pessimistic view of what would happen with that revenue stream, and it came in surprisingly strong. So I'm kind of wondering, could that happen again? Or is this a strategic move on your part to limit that revenue?

Jorge Luis Titinger

So we are in ongoing conversations with the customers to see if there are value-added areas of the business where we can provide -- continue to provide services to them that are more in line with our business model and can produce more value to them. But for business that is in that kind of margin target, it is something that we would much prefer to replace.

Robert J. Nikl

Mark, it's Bob. As we've been discussing, I think, over the course of the last 2 or 3 quarters, it's somewhat opportunistic to us. In other words, it has to be at volume levels that more than offset the cost constraints, if you will. And to the extent that it starts to displace potentially larger-margin business, it strategically makes sense for us to consciously not want to pursue it with the kind of enthusiasm, perhaps, that one might want to chase just for the size of the revenue dollar itself. I think we are more biased towards getting the type of revenue that meets our longer-term business models and affords profitability commensurate with the value that we see providing.

Operator

Our next question comes from Glenn Hanus with Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

So could you talk around what you view as the biggest swing factors in 2014, from a revenue perspective? Are you signaling now that you have better visibility on the large cloud wind-down? And that was probably your most uncertain stream, was my impression. So could you comment on that? And then as you look through the rest of the product lines and swing factors, where do you think you have the most visibility? And where do you think would be the greatest opportunity or risk, as you look at your model?

Jorge Luis Titinger

Sure, Glenn. So there's certainly more clarity for us in the last 30-plus days on the direction that the cloud infrastructure business is headed. And we have sized that appropriately in the numbers that we gave you for the year. And if we look at -- and what we're saying is, a lot of the low-margin deals, and a big part of that business, we are planning on replacing with better-margin business throughout the year. The 2 areas where we see significant growth opportunities, as I said in my comments, are in our ICE X product line, where we have a very strong pipeline. We already have some significant bookings. And we're now, given the technical differentiation of the product, we're now being invited to participate in businesses that, in the past, we haven't participated in. And then on the UV side, although our UV business in fiscal '13 was less than we would have expected, we are now seeing that pipeline grow significantly. We have $200 million of pipeline in UV. Not all of that will convert in fiscal '14, but we see significant growth of that business as well. So these are areas of better margin, of better opportunity for us. They open up the opportunity for us to continue to do large deals that are in line with our business model, and we're very excited about these 2 products. Outside of Compute, with the introduction of our Gateway product in Storage, that has started to see pretty immediate acceptance in the market, which is not typical. When you introduce a new product, there's typically a not-so-short period of building pipeline. We already have multiple deals that we will ship this quarter. So we expect our storage business to also grow significantly in FY '14, all of that essentially making up for the delta in low-margin deals and our infrastructure business.

Glenn Hanus - Needham & Company, LLC, Research Division

And can you maybe talk a little bit about where you think you stand from a sales realignment standpoint? I mean, you've done a great job operationally on a lot of the cost initiatives. And now, my understanding is you're realigning the sales group better. Can you give us an update on how far along do you think you've come there? And what are kind of some of the major projects in that area that you're still working on?

Jorge Luis Titinger

Yes. So if I were to look at percentage completion, if you will, of the realignment in that area, we're probably somewhere in the 50-plus percent. A lot of the work that we're doing with our sales team is on educating them on selling solutions instead of just hardware, educating on storage, building capability in areas where we hadn't -- we didn't have a strong presence and continuing to narrow the focus on the verticals that matter rather than selling across the entire universe of opportunities that we might pursue. So I see upside as well in -- as we continue to make progress in that realignment and our impact in fiscal '14.

John Swenson

Glenn, it's John. I would add to that, a lot of it is about new leadership in marketing, if you will, product marketing: new vertical leaders, new people behind some of these product initiatives that are providing the leadership and structure to help the sales force sell.

Jorge Luis Titinger

So we've invested a lot in sales enablement, and that has started to show up as we build our pipeline and our opportunities.

Glenn Hanus - Needham & Company, LLC, Research Division

And lastly, for me, it sounds like second half -- somewhat second half loaded. Could you just talk about your visibility on the Federal side? And do you feel you have pretty good visibility on the year or, with some of this sequestration stuff, that you have a big pipeline but a fair amount of uncertainty there? Can you give us some context on your visibility on Federal for the year?

Jorge Luis Titinger

Sure. So the -- I think we have a pretty good visibility on Federal. Clearly, in the Federal space, we pursue fairly large deals. Many of those have implementation timelines that are in the second half of the year although the deals are being discussed and pursued in the first half, in many cases. So we are -- again, like you said, Glenn, significant pipeline in that space. We anticipate quite a bit of growth in Federal based on the opportunities we are pursuing, the responses we're getting on those opportunities. But much of the revenue will show up in the second half. So because of the nature of the deals, they tend to be first half opportunities from a bookings perspective, but the revenue will show up later.

Robert J. Nikl

Yes, Glenn, if I could just build on that. I mean, I was in Washington a couple of weeks ago, meeting with a lot of key account stakeholders, and, again, was very pleased at how we're being too encouraged to bid on more projects and larger projects. One of the self-limiting things that the company had in the past was the lack of what's called a qualified cost accounting system, or CAS. We're in the late stages, now, of developing compliance data, which will enable us to bid not only on larger projects, but also qualify for more NRE refunding. So as I say, the inputs I am getting from our accounts has been very, very optimistic, very encouraging.

Operator

Our next question comes from Shebly Seyrafi with FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

So I just want to make sure I heard you guys right that -- I'm calculating that your cloud revenue was about $46 million or so in the June quarter, and I think you talked about a decline in the first quarter of $25 million to $30 million in the cloud. And that would be a big percentage of your cloud business. And your cloud was, I calculate, 21% of revenue for the year, with 18% from that large customer. It seems like, with my math, that's projected to decline to around maybe 7% of revenues this year. Can you just maybe -- maybe if you can talk about this?

Jorge Luis Titinger

I haven't done the math exactly like you're doing it, Shebly. But yes, we are talking $25 million to $30 million decline in the first quarter -- likely decline. We're managing to that. And for the whole year, a fairly significant decline as we shift resources to areas where we can produce better revenue and better margins. Like Bob said for the whole year, we are anticipating growth off of the base of the $700 million x LMDs. So one way to think about it is, essentially, this is causing a shift in timing. We are projecting a 45-55, 40-60 kind of split, half-to-half, on revenue and 1/3-2/3 on earnings. So it's fairly negligible impact based on all the work that we're doing in the other areas of our business. But for that particular segment, it is a pretty significant decline.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. So just to share, I mean, with my math, your x cloud revenue would have to grow around 16%, rough numbers, to hit that line of 8% to 10% x LMD for the year, which I think is consistent with what you just said. So a few other things. In the past, in 2010, your December quarter revenue grew like 50%-plus sequentially, and then it didn't after that. But do you expect the December quarter to be better, sequentially, in growth than the recent past? I think it was like 90% or so sequentially in the recent past. Or do you expect it to be, perhaps, even better than that? And along the lines of the previous question or so, I just want to know about your visibility into the December quarter and even to your 8% to 10% x LMD projection for the year.

Robert J. Nikl

So Shebly, let me try to at least take the first part of the question. As Jorge said, I think the way I'm looking at it internally is -- I think the earlier view was, from the standpoint of sequential growth, to be much more straight-lined and leveled to the right. And what we're suggesting now, I think, is that -- my split for the halfs would be roughly 45% in the first and 55% in the back half. So that would imply some sequential growth in Q2. Not dramatic, by any means, but it is somewhat problematic from a timing perspective. The visibility that we have is very much wrapped around pipeline and projected order flow. But since a very significant part of the business and growth that we're looking at next year is tied to Federal, I think, as our comments earlier indicated, it's somewhat problematic because the sense I got, at least, in my discussions back east was that when we get to the government's fiscal year at the end of September, we're right back where we started again from the standpoint of the big debate and CRs and sequestration. So I don't think it impacts our businesses as much, but there's still somewhat of a hesitation or reluctance to formally commit to things. It's problematic for us right now, and I think that's been part of the discussion for the last several months since we found ourselves without any kind of budget. In terms of -- I don't know if I'm answering your question adequately, but we don't look at growth as something sequential, quarter after quarter after quarter. There's a natural kind of lumpiness, given the size of some of the larger deals.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And last one for me. Looks like you're going to have some positive mix factors -- or positive factors overall, that is, in your gross margin. One being Jabil. Maybe you can talk about how many percentage points you think it'll help you in the gross margin line. I think you said 18 to 24 months before it's fully ramped. And also, like I said, with my math, you're going to go from 18% -- or 21% cloud down to like single digits cloud. That's a positive mix factor on gross margins as well. So with those 2 factors, where do you think your gross margins can go to in the next, say, 2 years, 3 years?

Robert J. Nikl

Yes. So I think from the standpoint of Jabil, again, it's going to be very much predicated on how quickly and how much of the supply chain they assume. Over time, history would suggest that it's at least 1 or 2 percentage points of gross margin. Whether or not I get half of that in the current fiscal year or do better, it still remains to be seen. We are, at the moment, doing our final due diligence and trying to strike definitive agreements for manufacturing services. I believe, based upon the margin mix, that our longer-term model, which, I think, we've been describing as 31%, 32%, is not unrealistic at the end of 2 years.

Operator

Our next question comes from Alex Kurtz with Sterne Agee.

Unknown Analyst

This is Craig in for Alex, but we just had our questions answered.

Operator

Our next question comes from Mike Shinnick with Wasatch.

Michael Lawrence Shinnick - Wasatch Advisors Inc.

I want to open up the aperture a bit. Looking forward, my first area of focus is just on the degree of further restructuring to come. I know a lot of the focus last year was on the LMDs. You talked about reducing the operating expense run rate by about $20 million. I think the pace of the European restructuring took a bit longer. One comment might be this company has had a history, even before this team arrived, of kind of having serial onetime charges. Can you give us your sense of when the restructuring is done, please?

Robert J. Nikl

Sure. I think by any measure, when we look at, say, the $20 million of OpEx plus close to another $5 million of cost reduction upstairs in cost of goods sold, one would have to describe what we did last year as rather surgical. I think as we go forward now, absent any new factors beyond our control, it would be more pruning around the edges. So I suggested another 5%, which would amount to about $10 million. But I think that's just, again, necessary rebalancing where we think we can go from a productivity and efficiency standpoint. The breakthrough -- the next breakthrough, if you will, I think is going to be fairly much predicated on IT enablement. During the prepared remarks, we talked somewhat about the investment in IT systems. The architecture here is fairly old and dated, and we still are somewhat hampered by an enormous amount of manual processes which need to evolve to where the current state of the art is. And I think that's what's going to enable the next rounds, if you will, of cost optimization as opposed to just restructuring, restructuring, restructuring. I think pretty much a lot of that is behind us now.

Michael Lawrence Shinnick - Wasatch Advisors Inc.

And is the way to think about that spend, based on your range, that it would represent roughly $0.40, $0.45 in earnings for the year that's going to go towards this investment in the enterprise IT?

Robert J. Nikl

Except for the areas within OpEx that we choose to reinvest in. So I don't think we're still at the right investment level, if you will, for some of our R&D programs or even when we look at sales and marketing. I think we have to be somewhat more scientific, if you will, about this. So it's not simply a matter of cost in, expense out, out, out. There will be some reinvestment to go after the kinds of market opportunities that we believe in.

Michael Lawrence Shinnick - Wasatch Advisors Inc.

But with...

Jorge Luis Titinger

And it's also our balance sheet versus...

Robert J. Nikl

Yes. We -- sorry, I didn't...

Jorge Luis Titinger

I think, Mike, you're looking at the dollar amount that Bob talked about on the investment.

Michael Lawrence Shinnick - Wasatch Advisors Inc.

Yes. $10 million to $15 million. I was taking the high end of that, and then I was doing $15 million over 33 million shares.

Robert J. Nikl

Right. So in terms of the capital, the math is correct. The depreciation schedule on that would be 7 years, at least. So the P&L impact, once that investment begins to hit the P&L, isn't a meaningful change from where we are today.

Michael Lawrence Shinnick - Wasatch Advisors Inc.

Okay. And, Jorge, can you talk a little bit about the progress with services and services margin? I know, and rightly so, a lot of the focus has been on the hardware or the product gross margin profile. Where do you see the services going? I know you're taking a more direct role there.

Jorge Luis Titinger

Yes. So the -- we're going to talk in 2 areas. So one is the service from a perspective of maintenance of the install base. And that, we see continuing to operate fairly similar to what we've done in the past, which is somewhere in the 20% of revenue, depending on how much product revenue we have. We're working, again, on improving margins in that area. I think the supply chain realignment will help in that area as well. And -- but that is steady progress. The areas where we're, again, investing and we expect significant progress is in the area of more value-added services: professional services, consultant services that, as we move into continuing to sell solutions, will be a larger part of our business. And so, we're making progress in those areas as well, but it will be tied to the penetration of our new products sold as solutions into the market. Again, we should see much nicer numbers in the second half of the year. But that's an area, again, where we put a lot of attention. We are continuing to add focus in that area and develop capabilities, not only internally, but through some of our partners to deliver that service capability.

Operator

Our next question comes from Glenn Hanus with Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

Just a quick follow-up, Bob. Maybe I missed it, but are you maintaining the calendar '13 sort of exit run rate, 5% operating margin and $1 per share? Or just given the back end, some of the changes in the cloud and some shifting schedules, have you taken that off the table now?

Robert J. Nikl

More the latter, though not taking it off the table so much, Glenn, as simply, again, more back-end loaded. While I said earlier about revenue being 45%-55% for approximate first half, second half purposes, my current expectation is that EPS probably will look more like 1/3 and 2/3.

Jorge Luis Titinger

It's too little. $1.

Robert J. Nikl

But still -- yes, the expectation of at least $1 of earnings. So I think the total column hasn't changed much, but the timeline profile has somewhat, as a result of the cloud discussion.

Glenn Hanus - Needham & Company, LLC, Research Division

So now more like exiting the fiscal year?

Robert J. Nikl

Well, certainly, it would be more likely by the time we get to the third quarter. Because if you look at the top line based upon that sort of a calendarization, but assuming that my cost envelope isn't going to expand at the same sort of rate that revenue would, I think there is a revenue point where all of a sudden it gets very, very positive from a flow-through perspective. So I wouldn't put it all the way at the back end of the year. I would say I'm looking more to get there near the time in Q3.

Jorge Luis Titinger

So in summary, in a sense, based on our revenue to '13, 3x the profitability with -- actually, fairly similar half-to-half revenue than '13, right, where we had a bigger second half than first half. So that's the summary for what we're seeing for '14.

Glenn Hanus - Needham & Company, LLC, Research Division

Yes, so a much more dynamic product mix.

Jorge Luis Titinger

Correct.

Operator

And I'm showing no further questions at this time. I will turn the call back over to John Swenson for closing remarks.

John Swenson

Thanks very much, and thanks everyone for joining us. Note, we'll be at 2 conferences in the coming few weeks: the Oppenheimer Tech Conference on August 13 in Boston; and the Deutsche Bank Tech Conference, September 11, in Las Vegas. This ends our call for today. Thanks again.

Jorge Luis Titinger

Thanks, everybody.

Operator

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Silicon Graphics International Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts