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Cray Inc. (NASDAQ:CRAY)

Q1 2014 Earnings Conference Call

April 29, 2014 16:30 ET

Executives

Paul Hiemstra - Corporate Treasurer and Investor Relations

Peter Ungaro - President and Chief Executive Officer

Brian Henry - Executive Vice President and Chief Financial Officer

Analysts

Chad Bennett - Craig-Hallum

Alex Kurtz - Sterne Agee

Glenn Mattson - Sidoti & Co

Glenn Hanus - Needham & Co

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Financial Results Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Corporate Treasurer and IR contact, Paul Hiemstra. You may begin your conference.

Paul Hiemstra

Thank you. 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 in 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 32831166. 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. Non-GAAP measures, other than non-GAAP outlook, have been reconciled to their related GAAP measures in accordance with SEC rules. Our non-GAAP measures adjust for certain non-cash unusual and infrequent items included in our GAAP results.

Typical adjusting items include stock-based compensation, amortization of purchased and other intangibles and purchase accounting adjustments. We also adjust our book tax provision for certain items including the impact of non-cash items such as benefits principally related to our net operating loss carry-forwards and changes in the valuation allowance held against our deferred tax assets.

You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures and a discussion of our non-GAAP outlook in our earnings press release, which is posted on our website and which is included with a related 8-K furnished with the SEC.

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

Peter Ungaro

Thanks, Paul, and thank you all for joining the call today. I’ll start with some comments on our first quarter performance then turn it over to Brian who will go through our financial results and outlook. I’ll wrap up by discussing our focus areas for the rest of the year and open the call for Q&A.

Despite a loss for the quarter we got off to a solid start to the year and made significant strides toward achieving our full year goals. We outpaced the Q1 revenue goal we’ve previously laid out as we had a good quarter in our supercomputing business and we also made progress in our Big Data efforts as we work to expand into this fast growing market.

Our product margins for the quarter came in a little lower than our both our historical average and what we’re expecting for the year. Brian will take you through what drove this for Q1 but I want to note that despite this we’re maintaining our margin outlook for the year.

As you know we have a fairly lumpy business with large transactions often driving our revenue results from quarter-to-quarter. And our product margins and earnings tend to fluctuate nearly as much. That’s why we continue to believe that a full year is a proper horizon to evaluate our progress. I want to keep you in update on each of our achievements in each of our product groups during the first quarter.

In supercomputing we have two primary product offerings, our XC30 and CS300. The XC30 is our most advanced supercomputer able to deliver extreme scalability and sustained performance in a variety of data-intensive computing applications. The CS300 is our cluster supercomputer which provides flexible configuration options and energy efficient and modular platform.

During the first quarter we had several supercomputer installations in Japan, the United States and in Europe where we added a new automotive industry customer. A great example of the power of having our two complementary supercomputing solution played out at Kyoto University in Japan where we installed an XC30 with a CS300. These are a follow-on to an existing Cray XE6 supercomputer and we’re proud to continue to support their research and development goals while also expanding our footprint and Cray solutions at the university.

A big piece of news that we also announced today is that we were selected by the U.S. Department of Energy’s National Energy Research Scientific Computing Center also known as NERSC for a $70 million contract to provide their next flagship system in the 2016 timeframe. This will be a next-generation XC supercomputer and will provide NERSC vast user community of more than 5000 scientists with an advanced supercomputing resource to support its large production workload.

We have a great partnership with NERSC as this center currently has a Cray XC30 means Edison and a XẸ6 means Hopper. In fact this future generation system will be 10 times faster than Hopper and feature new Cray and Intel technology. By integration the area’s high-performance interconnects our tightly integrated software environment and Intel’s next-generation Xeon Phi processor coordinating Knights Landing. This future system will be a significant step on our roadmap. I firmly believe this win is another strong proof-point that our supercomputing roadmap will continue to stay at the forefront into the future.

During the first quarter we’re also selected by the Hong Kong Sanatorium & Hospital, one of the largest private hospitals in China to deliver an XC30 supercomputer later this year. This will be our first XC30 system in China and hope to be deployed in a number of research areas including bioinformatics and next-generation sequencing. In storage and data management, we have two complementary offerings, our Sonexion storage system and our new Tiered Adaptive Storage archive solution also known as TAS. Each of these provides customers with unique scalable solution that solve some of the toughest data management problems.

We’re awarded our first TAS contract during the quarter with a new win at the North German Supercomputer Alliance. This installation consists of more than one petabyte of data storage and is upgradable by nearly two orders of magnitude. TAS provides them with a fast path to move from their existing Oracle SAM-QFS installation to the new Cray TAS archive with an easy data migration. We also completed several Sonexion installations this past quarter including a government and academic customers in the U.S. and Europe and have multiple customers in the Energy segment across both North and South America.

In Big Data Analytics we continue to make progress with our Urika data discovery appliance during the first quarter. We received a new order from an international government customer that chose Urika based on it’s capability to scale on large graph analytics workloads. Urika has a unique ability to do large scale data discovery in a fraction of the time of other systems.

Finally in March we announced the opening of a second manufacturing facility in Chippewa Falls, Wisconsin, the birthplace of Cray and home through our existing primary manufacturing facility. With the addition of this new facility combined with the recent upgrades we made to our existing manufacturing sites, we roughly doubled our manufacturing capacity which will help enable our future planned growth. We’re proud to continue our long history with the city of Chippewa Falls in the State of Wisconsin. We’re excited to have this additional capacity online.

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

Brian Henry

Thanks, Pete and good afternoon everyone. Before I get into the 2014 outlook let me first take you through the first quarter financial results. For the first quarter revenue was $55 million and as anticipated we reported a net loss. GAAP net loss was $12.9 million or $0.34 per share, product revenue for the quarter was $30 million, service revenue was a strong at $25 million.

Please note that the majority of my remaining comments are going to focus on our non-GAAP measurements which we feel that is the best way to look at the company and our progress. Our non-GAAP operating loss for the first quarter was $18.7 million. Our non-GAAP net loss for the first quarter was $17.6 million which was $4.7 million more than our GAAP net loss. The difference was due to a smaller net tax benefit from a lower non-GAAP tax rate.

For the first quarter total non-GAAP gross margin was 34% or about one point higher than our GAAP gross margin. Product margin was 21% and service margin was 47% both on a non-GAAP basis. Product margin for the quarter was impacted by a low level of product revenue and a higher proportion of cluster revenue which tends to carry lower margins.

However as Pete mentioned our gross margins particularly our product margins can fluctuate significantly from quarter-to-quarter depending on the number of items – of a number of items inherent in our business. We’re maintaining our gross margin outlook for the year. Non-GAAP operating expenses for the first quarter totaled $37.3 million somewhat higher than last year primarily driven by our investments in our Big Data storage and analytics.

Our first quarter operating results included $3.3 million for depreciation. Total cash investments and restricted cash at the end of the first quarter was $279 million compared to $220 million at the end of 2013. At the end of the first quarter net working capital which generally is less volatile was $315 million compared to $335 million at the end of 2013. Now about half of the difference was driven by an increase in our long-term investments which I’ll characterize this long-term currently carrying maturity of less than 18 months.

Inventory at March 31 was $118 million compared to $95 million at the end of the year with 52% or $62 million already out at customer sites and in the acceptance process. For those of you that review our segment footnote in our 10-Q and 10-K filings you’ll note that we made an adjustment and how we report this information beginning this quarter. Our supercomputing and storage and data management segments now include both product and related maintenance and support revenue for these segments. We made this change to more accurately reflect how we track the business and in our opinion it better measures the impact of these segments on our business.

I’d now like to take a moment to discuss our outlook. As a reminder our revenue results for – in a period are highly dependent on a number of variables including the limited number of significant customer transactions and the timing of system acceptances. Our system acceptances are impacted by several items including the variability timing of third-party components. We’re maintaining our outlook for 2014. While a wide range of results remain possible we expect revenue to be approximately $600 million for the year, revenues are expected to ramp quarterly with roughly $75 million in the second quarter and somewhat more than 50% of our annual total coming in the fourth quarter.

As typical our second quarter results are expected to be dependent on a few significant customer acceptances that are likely to come down too late in the quarter. For the year overall non-GAAP gross margin is anticipated to be in the mid 30% range. Total non-GAAP operating expenses for the year are expected to be in the range of $175 million. Other income and expenses are expected to be in the neutral to slightly negative 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 2014.

Our reported GAAP effective tax rate for 2014 is expected to be about 40%. Our effective tax rate for Q1 was 42%. Tax estimate is highly dependent on a number of variables. However the large majority of our reported income tax provision for 2014 is expected to be offset by previous net operating losses and that’s not require cash. Based on this outlook our effective non-GAAP tax rate is anticipated to be about 10% for the year.

Share count when profitable should be in the $40 million to $41 million range but is dependent on a number of factors including our share price. We expect cash and investments to fluctuate significantly quarter-to-quarter are likely to be lower than Q1 levels for the next few quarters, as we build inventory for second half deliveries. In summary we continue to make good progress. With continued focus and execution we’re well positioned to deliver on our outlook.

With that I’ll turn it back over to Pete.

Peter Ungaro

Thanks, Brian. I’d like to give you an update on our two major focus areas for the year. The first is to keep the company on a strong growth path in our targeted markets of supercomputing and Big Data storage and analytics. Our goal is to grow two times faster than the growth rate in each of these three markets.

With two offerings in supercomputing, two in storage, one in data analytics and another on the way, we believe we are well positioned to grow and take additional share in these growing markets. We have a strong history of building some of the highest performing computers and storage solutions in the world and we believe this legacy and expertise puts us in a unique position to play a key role in each of our target markets.

Our pipeline remains very strong and has been consistently growing. We signed a number of new contracts recently for revenue later this year as well as in future years including in each of our major geographies around the world and for each of our product line and customer segments. In addition to securing new contracts on the development side our roadmap includes several key deliverables for the year.

The largest of which is to deliver new XC and CS systems based on the next-generation of Intel’s Xeon processors known as Haswell which when combined with their unique Cray technology are expected to deliver a major performance improvement. We’re working closely with Intel to remain on track to deliver systems with these new processors during the second half of the year and as I mentioned with our big win in NERSC we have a lot more exciting technology plans over the next few years.

Our second major focus area for the year is to continue to establish a stronger presence in the Big Data market across both storage and analytics. As I mentioned earlier our Sonexion storage system, a new TAS archive solution provides customers with unique scalable offering that solves some of their toughest data management problems. On the Big Data analytics front we continue to target four primary market verticals with their Urika data discovery appliance, life sciences and healthcare, financial services, cybersecurity and threat analytics and scientific computing.

In addition to customer wins in each of these markets we’ve also seen early success with customers outside of these verticals including telecommunications, consumer electronics and sports and entertainment among others. In addition to Urika we’ve also enabled both for supercomputing platforms to use Hadoop to manage scientific Big Data. This is another step forward as we continue to fill out our analytics portfolio and see synergies between the world of supercomputing and the world of Big Data.

Before I open it up for Q&A I would like to give a special thanks to John Jones who is stepping down from our Board of Directors after nearly 10 years of service. John has been a great mentor for me and has played a key role and working with us to shape our strategy which has helped propel our company to a leadership position in a fast growing market today. On behalf of the entire team at Cray we wish him well in all of his future endeavors.

In conclusion I’m pleased with our progress during the first quarter. While we still have a lot of work left to do in order to deliver on our outlook for the year, our strategy and plans are solid and we’re in good position in the market to deliver strong growth and profitability again in 2014, as well as to continue to grow in future years.

With that I’ll now like to turn the call over to the operator to begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Chad Bennett [Craig-Hallum].

Chad Bennett - Craig-Hallum

Hey, good afternoon guys.

Peter Ungaro

Hi, Chad.

Brian Henry

Hi, Chad.

Chad Bennett - Craig-Hallum

Just – I think a couple from me. First on the win that you announced today, it looks like NERSC deal. Can you talk about the competitive landscape for that win and who you competed with and maybe if it was IBM maybe what system they bid if you’re aware of that? And then secondly I believe the deal we and the Office of Science and NERSC had a couple of systems that they were actually looking to procure and I don’t know if it was a joint RFP or what. Is this one of the systems and the other one is still out there or was that already awarded? Thanks.

Peter Ungaro

Yes, great question, Chad. So we’re super excited about the win in NERSC. NERSC has been a partner of our over the last couple of systems. As you could imagine with this $70 million procurement pretty much kind of attract everybody out of the woodwork to come out and compete and you’re right. The Department of Energy had two major procurements going on in different timeframe so they have one procurement which was broadly known as Trinity and NERSC-8 and they had another procurement that’s out in the later timeframe called CORAL. So this was obviously part of that Trinity and NERSC-8 procurement.

Trinity, just to explain it a bit, the Trinity system is targeted at Los Alamos and Sandia National Laboratories and the NERSC-8 obviously being targeted at NERSC. So that was a single procurement that they then did two different awards, so one RFP so to speak for two completely different systems they’ve now awarded the NERSC system obviously and we won that. So we’re very excited. They have not yet won or awarded the Trinity system. So that’s still TBD on that one.

Chad Bennett - Craig-Hallum

Okay. But that award timing-wise is relatively near term as I understand or has that changed?

Peter Ungaro

No, it’s generally thought to be relatively near term. The Trinity system is larger than the NERSC system and but that award is planned over the next a little bit. The other procurement that is in the DOE is this CORAL procurement that I mentioned and (NERSC) Oak Ridge, Argonne National Laboratory and Lawrence Livermore National Laboratory. And that’s a pretty unique contract which is a system well out in 2017, 2018 kind of timeframe with a huge R&D component as part of that. We actually decided not to prime that contract. So we didn’t directly bid on that contract. We’re participating in another bid on that contract but didn’t prime it because of the unique R&D components of it. And that one is supposed to be awarded later this year so kind of second half of the year.

Chad Bennett - Craig-Hallum

Okay. And is it safe to say IBM was competitive in the NERSC field?

Peter Ungaro

Well we don’t know exactly who the competitors are but we believe that IBM as well as everybody else we could think of competed in that bid.

Chad Bennett - Craig-Hallum

Okay, great. And then one last one from me just on margins maybe for Brian, it sounds like a heavy mix of cluster systems in the quarter Appro products. I guess was there any kind of notable storage or Urika revenue in the quarter?

Brian Henry

There were revenues from both of those in the quarter. This quarter because it was pretty heavily as you mentioned cluster-based we tend to have a little lower attach rate on the storage. So this wasn’t a – the highest percentage storage quarter but we feel real good about where storage is going to come out for the year and we made progress with the Urika product line this quarter and with a number of opportunities. So.

Chad Bennett - Craig-Hallum

Okay. And then how does that mix – does the mix change a lot, Brian, next quarter based on kind of that $75 million number that you gave for revs?

Brian Henry

I think you’ll find that storage will be much better represented over the next several quarters than it was in this first quarter. And we have plans to continue to make progress in the Big Data products particularly the Urika product in the near term.

Chad Bennett - Craig-Hallum

Okay.

Peter Ungaro

And that’s why Chad we’re keeping our margin outlook the same. We – it’s just the mix of what kind of hit in the first quarter versus what we expected as we look at the whole year. So we expect a little catch up on some of the other products in second quarter end beyond.

Chad Bennett - Craig-Hallum

So it sounds like Q2 is maybe closer to that 30% range? Is that fair?

Brian Henry

We expect you know it’s hard for us.

Chad Bennett - Craig-Hallum

Product wise I mean.

Brian Henry

Yes, it’s hard to say any particular quarter, but our goal is to have product margins similar to where they were last year which is in the low 30s.

Chad Bennett - Craig-Hallum

Okay, thanks guys. Nice job again in the quarter.

Peter Ungaro

Thanks, Chad.

Operator

Your next question is from Alex Kurtz [Sterne Agee].

Peter Ungaro

Hello.

Alex Kurtz - Sterne Agee

Yes. Thanks guys for taking. So I think last year or sometime either this quarter or last quarter or the following quarter you provided to the street Peter some comments around visibility for the rest of the year. And I was wondering if first part of my question could you take a stab at given the deal flow and now that’s almost May here. How do you feel about being able to close on the $600 million?

Peter Ungaro

Yes. That’s a great question, Alex. There is still a lot of work to go right. We have lot of time to go in the year and we have development efforts as well as some sales that we still guided to. But we tend to look at this and kind of just look where we’re sitting as far as the percentage of our year overall and such. We’re in a better shape than we were at this same time last year, so we’re ahead of kind of the track that we’re on last year for our full year outlook. So we feel pretty good about where we sit right now for the year.

Alex Kurtz - Sterne Agee

And are there any specific deals I know Q4 is a big number for people to look at it. Are there any specific deals in Q4 that you already have some visibility into it, so maybe if you were to back out certain deals you have a little bit greater confidence in that Q4 number or they all sort of up for grabs here at the end of the year?

Peter Ungaro

No, a number of the Q4 deals are already booked. We have contracts for a number of them already. We still have to win a few of them so we – there is kind of a mix out there. Our biggest focus area on the development side as I mentioned in my comments was around the Haswell processor, right. So a lot of the reasons why Q4 is very large this year is all around Haswell and delivering that both in the XC30 and CS300 frameworks, but a number of those deals we already have booked. So we feel pretty good about where we are, there is still some more revenue bookings that we have to do to close out the year but it’s really from my perspective a lot around getting Haswell out on time, getting that shift to customers and they have to install our product so we can get acceptances by the end of the year.

Alex Kurtz - Sterne Agee

Just two last questions and I’ll jump. Just on the Haswell issue, any changes at all in your view about the timing of the delivery of that product so you can hit that Q4 number? And then my last question is in the DOE deal that you announced today, was it BlueGene or some of their cluster products that you were competing against?

Peter Ungaro

So – on the Haswell front nothing has really changed. So we remain on track for deliveries there. We’re focused the majority of those deliveries we believe are going to be in our third quarter as when we’ll deliver the majority of those Haswell avenues that’s for acceptance primarily in the fourth quarter. So that’s how we see that play out. We’ve had Haswell in-house for a while early version of that so we can get all of our software and new boards and all of that development has worked out.

So I feel like we’re in good shape but until you’re done, you’re not done, right. And so we always watch that one. Again on the NERSC procurement we’re not exactly sure what IBM put forward. Our best guess is that they bid a cluster technology. They don’t really have any stated follow-ons yet to their BlueGene products that we don’t think in 2016 that BlueGene was probably a viable candidate but we’re not 100% sure. So that’s a little bit of speculation on my front.

Alex Kurtz - Sterne Agee

Alright. Thanks guys.

Peter Ungaro

Yes.

Operator

Your next question is from Glenn Mattson [Sidoti & Co].

Glenn Mattson - Sidoti & Co

Hi, good afternoon everybody. In the past like last year you said that big fourth quarter was like six large deals I believe. Have you broken out what this big fourth quarter will be this year? Is it that many deals of a similar size or are there larger deals than that in there?

Peter Ungaro

Yes, great question, Glenn. So the fourth quarter is actually a larger number of deals than it was in the fourth quarter of last year which gives us a lot of good feeling because our business is really getting less and less dependent on a mega deal in a year although we just announced the year Glenn but – we don’t mind those mega deals by the way, it’s not dependent on them and that’s where we want to be as far as the business. So it’s a broader number, I don’t know the exact number, but a number probably around 10 ish or so of larger deals. So that’s the way we think about Q4.

Glenn Mattson - Sidoti & Co

Okay. And just to like to get a better sense of what the reason why you have such good confidence as to them close in Q4, is there some kind of a impetus that makes people want to help you get to that spot by the end of the year or is it just a matter of you guys getting in there and making it happen?

Peter Ungaro

Well I think it’s a little bit of both I mean we have great partnerships with our customers I mean we really pride ourselves in having some great relationships with our customers. And for them they are incented to get these systems into production, the faster that they can get these systems into production, the faster they can start delivering cycles and a better return on investments so systems are for them. Of course on our side the faster that they can get them into production the faster we get them for revenue, right and to extend the process.

So we’re both kind of going towards the same thing, the faster that we can get these systems up and running the better it is for both parties. And so we’re pretty much incented along the same thing. Of course customers aren’t going to accept machines, that aren’t perfect, that aren’t able to go into production so there are always things that we have to work on through the process. These are very big machines and there is a lot of technical challenges to them, but we feel really good about where we sit right now from both our – where we sit as far as the contract that we have going into the full year. As we look at that Alex I answered a question on that earlier as well as where we are in the development cycle right now for the end of the year.

Glenn Mattson - Sidoti & Co

Okay, thanks to that. And then I guess lastly on the Big Data side, you guys had talked in the past about putting out a second product in this first half potentially. Can you talk about it? Is that still on track? And maybe anecdotally are you talking in advance of the release, are you talking with potential customers or partners or anything like that to get that product to hit the ground with a good speed?

Peter Ungaro

Yes. That’s a great question again. So we’re – we decided that we’re going to roll it out very similar in many ways than how we rolled out in Urika when we did that and it worked very well for us. So we want to shift some early customers and then we’ll make the product generally available later on in the year. So our plan right now as this start shipping our early kind of beta level systems near the end of this quarter so we’re on track for doing that. And then we plan to announce this system closer to kind of our general availability date which will be later in this year.

Glenn Mattson - Sidoti & Co

Okay.

Peter Ungaro

So we definitely are working with early customers, we want to get some machines into some customer’s hands and flushed out with real customer workloads as early as we can.

Glenn Mattson - Sidoti & Co

Great, okay. Thanks guys.

Peter Ungaro

Yes. Thanks, Glenn.

Operator

(Operator Instructions) The next question is from Glenn Hanus [Needham & Co].

Glenn Hanus - Needham & Co

Good afternoon.

Peter Ungaro

Hey Glenn.

Glenn Hanus - Needham & Co

So just maybe to finish up on Yarc some more, do you feel like you’re on track for the year to basically double revenues there? And maybe you could just talk a little bit anecdotally on the verticals and how you see the opportunity and market evolving over the last 90 days or so?

Peter Ungaro

Yes. That’s a great question. So our goal is definitely to double year-over-year in that business. And coming from a small number we’re definitely still very much focused on that. We – I feel we’re on track for that overall. We announced a new customer in the quarter international government customer that is – that’s a very challenging type problem that is a perfect fit for what Urika can do and kind of the uniqueness of Urika overall. So I feel like over the last 90 days we continue to make good progress in the market. We continue to work with customers not only to do an initial system but to prove out Urika with their specific workloads.

The biggest surprise to us overall has been the breadth of customers. So we’re very targeted in our four kind of key segments that I mentioned life sciences, healthcare, cybersecurity, threat analytics, financial services and scientific computing. But we’ve seen customers come to us from a number of different other verticals and with similar problems that can leverage Urika. So I feel like we’re making good progress and really finding a unique spot for some unique technology in this whole Big Data analytics market. And I feel like we’re on track for doubling the revenue year-over-year. So I feel good about it.

Glenn Hanus - Needham & Co

Maybe you could talk a little bit more anecdotally about the commercial business. And I mean I know you weren’t really expecting that to grow as a percent of the business this year, but perhaps leveraging where you have traction in certain verticals like oil and gas and how you’re leveraging the success you’ve had and it sounds like you got an auto win over internationally. Can you talk about that some more, please?

Peter Ungaro

Yes, yes. I mean without a doubt increasing our commercial revenue is continues to be a focus area for us. I mean as we want to stay on our fast growth path and I think we have a great opportunity in the market to do that. Growing our commercial business is key to that because it enables us to get into a much, much larger marketplace for our systems overall. So why we don’t break it out? I will tell you in the first quarter we had a solid quarter from a commercial perspective. We had commercial wins in all four of our product groups and so that’s pretty exciting for us. We did pickup a new automotive customer in Europe which is really exciting win for us overall.

And in the energy space I mentioned that we had a number of storage wins in both North and South America. So, even commercial accounts, which is really our first kind of commercial penetration in South America. So I feel like we’re really starting to continue to make progress here and without – it moves up and down so it’s very hard for us to predict what percentage of our revenue this year will be commercial or not but I will tell you Glenn that we’re focused on continuing to grow that if you look at a longer term trajectory as a percentage of our overall revenue.

Glenn Hanus - Needham & Co

And you mentioned storage. How are you doing on penetrating like non-Cray environments, I think that was a strategic effort, if I recall right?

Peter Ungaro

Yes. One of our wins in South America actually be. We kind of hit the bell with this one. So with a non-Cray it’s actually storage with a commercial customer in South America. So we’re trying to kind of knock that and clicked a lot of boxes that we want to hit with that particular win, but there has been a number of those. I think that that’s coming along; it’s something we still need to really work on. I was really excited that we got our first win on the TAS side, our archive solution so that’s a very strategic product for us in the quarter. So I feel overall our storage business continues to grow. It’s pretty much on track for the year right now and I feel good about where its going to end up. So I’m pretty hopeful that we’re going to have a very good storage year again this year.

Glenn Hanus - Needham & Co

And you’ve been pretty positive on the overall just tone and pipeline and volume of opportunities you’re seeing in federal and internationally. Any change one way or another on any of that?

Peter Ungaro

No, I mean our pipeline continues to grow. If I look at kind of things from a competitive outlook perspective while there are a couple what I would call minor announcements in the quarter, there is nothing major from that standpoint. So competitively we feel really good of course as we talked about in the last quarter call because that we’re on the call. We have – the big news in our segment is the IBM sales of their xSeries business both their products and people to Lenovo. So that makes me feel great. It’s just going to open up opportunities, I don’t think so much this year but really in 2015, 2016, 2017 I feel pretty good about that opening up some more opportunities for us. So I would say just kind of continue – feeling good about kind of where sit competitively and what we’ve been able to win in the marketplace right now.

Glenn Hanus - Needham & Co

Congrats and thank you.

Peter Ungaro

Yes. Thanks, Glenn.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Peter Ungaro

Thank you. I’m really pleased with the start we are off to and excited about our prospects for the year. Our supercomputing product offerings are strong and our Big Data storage and analytics solutions continue to gain momentum in the market. We’re positioned to have a strong 2014 and continued success going forward. Thanks to everyone for joining the call and for your continued support in Cray. Have a great evening.

Brian Henry

Thank you.

Operator

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

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