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Silicon Graphics (SGI) disappointed markets after it released preliminary financial results for the recent quarter ending September 27. The reason, results were way below expectations and guidance. More specifically:

  • GAAP net loss for the fiscal first quarter is expected to be $6 to $7 million, or $(0.21) to $(0.18) per share, which compares with guidance of a GAAP net loss of $(0.14) to $(0.07) per share.
  • Non-GAAP net income for the quarter is expected to be $1 to $1.5 million, or $0.02 to $0.04 per diluted share, which compares with guidance of non-GAAP net income of $0.07 to $0.14 per diluted share.
  • Cash as of the end of the fiscal first quarter was $165 million, which compares with $179 million for the prior quarter and $96 million (net of debt outstanding) as of the same period a year ago. The change in cash for the quarter was primarily related to changes in working capital.

The company said "The revenue shortfall was primarily due to the impending government shutdown at quarter-end, which led to the freezing of funds for a Federal project; and to delayed acceptance of a non-Federal project."

While I do not doubt that certain government projects froze and it was impossible for the company to deal with the government, I am more than skeptical that the recent government shutdown is the only reason for the shortfall of the recent quarter.

Because if this is the case (and let's assume it is), then the company will exhibit pent up demand next quarter and make up for the shortfall. If this logic is correct, there was no reason for the 15% tumble of the stock in after hours trading on Thursday.

My personal opinion is that the stock's tumble has more to do with the company's revenue growth. If you look at the chart below, you will see that revenue -- with the exception of two quarters ago -- has basically been flat. Last quarter the company booked $170 in sales and analysts this quarter were expecting $167 million according to a recent Bloomberg poll. So while the government shutdown did indeed impact the quarter, a flat revenue trend has been in place for some time.

In addition, the company has been having a very hard time making any profits whatsoever. Both operating income and operating margins have been negative for some time now.

SGI Revenue Quarterly Chart

SGI Revenue Quarterly data by YCharts

In addition, the company has been having a very hard time making any profits whatsoever. Both operating income and operating margins have been negative for some time now.

SGI Operating Income Quarterly Chart

SGI Operating Income Quarterly data by YCharts

So while the market was disappointed by the quarter, I don't think it was holding its breath for a big surprise.

The question is, is the stock a buy? Sure it is, the stock is trading at a Price/Sales ratio of 0.7 and it is breaking even on a non-GAAP basis. In addition its cash levels are steady and growing. So there is value there, just not enough to excite investors at the moment.

(click to enlarge)

The stock is currently trading along its 50-day moving average with relatively strong volume on the down side. While I don't expect the stock to reach a new high soon, I would be a buyer if the correction continues towards the $12-$13 range. I think buyers at that level have very little risk and can expect to book relatively good capital gains over the next twelve-month period.

Source: Buy The Dip In Silicon Graphics, But At Lower Levels