Cray's (CRAY) CEO Peter Ungaro on Q2 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Cray Inc (CRAY)

Cray (NASDAQ:CRAY)

Q2 2014 Earnings Call

July 29, 2014 4:30 pm ET

Executives

Paul Hiemstra -

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

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

Analysts

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

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

Richard Kugele - Needham & Company, LLC, Research Division

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

Operator

Good afternoon. My name is Jeremy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2014 Financial Results Conference call. [Operator Instructions] Thank you.

I would now like to turn the call over to the Corporate Treasurer and investor relations contact, Mr. Paul Hiemstra. You may begin your conference.

Paul Hiemstra

Good afternoon. I'd like to thank everyone for joining us today. Participating from Cray are Peter Ungaro, President and Chief Executive Officer; and Brian Henry, Executive Vice President and Chief Financial Officer.

Today's press release is available on the Investor Relations section of our website at www.cray.com. This call is being broadcast live on the Internet and recorded for replay purposes. A telephonic replay will be available shortly after the call. You can access it by dialing 1 (855) 859-2056. International callers can dial 1 (404) 537-3406. You must then enter the access code 78154099. A replay will also be available in the Investor Relations section of the Cray website for 180 days.

I would 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 markets; 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 noncash, 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 noncash items such as benefits principally related to our net operating loss carryforwards 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 to the SEC.

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

Peter J. Ungaro

Thanks, Paul. And thank you, all, for joining the call today.

I'll start with some comments on our second quarter performance then turn it over to Brian, who will go through our financial results and outlook. I'll wrap up by discussing our focus areas for the rest of the year and open the call for Q&A.

We had a good quarter highlighted by the completion of several large supercomputer installations. Even more importantly, we recently secured some of the largest wins in our company's history. In fact, in the last few months, we've received new awards totaling more than $400 million, which is incredibly exciting for us. Several of these contracts are multiyear in scope, demonstrating our strong competitive position and the trust our customers have in our product roadmap for years to come. It's been a great run contributing to our continued confidence in our ability to deliver growth into our future.

For the quarter, revenue came in about $10 million higher than the target we previously laid out, as we were able to pull deals into the second quarter that were previously expected to hit in the third quarter. Our supercomputing products led the way, but we also had a nice quarter in Big Data led by solid performance in storage, which we expect to continue to ramp in the second half of the year.

Let me give you an update on each of our product lines. In supercomputing, we completed several XC30 and CS300 cluster installations around the world. Among these were the 3 new XC30 supercomputers and 2 Sonexion storage systems for the U.S. Department of Defense's High Performance Computing Modernization Program, at the Air Force Research Laboratory and the Navy Supercomputing Resource Center. In close partnership with each of these DoD sites, our manufacturing and customer support teams worked to achieve these acceptances in only a few months from the award, highlighting our ability to complete large, complex installations in relatively compressed time frames.

In addition to these 2 large DoD storage systems, we also completed the installation of a standalone Cray Cluster Connect Sonexion solution at a large global energy company. And in Big Data analytics, we hit a major milestone, which I'll talk about in a few minutes.

As I mentioned earlier, we've been on an incredibly strong run of new system awards over the last few months, including wins in each of our major geographies around the world. In addition to the $70 million award from the Department of Energy's National Energy Research Scientific Computing Center, which you might remember we announced the same day as our last earnings call, we recently received several additional wins as well. The largest of these came just this month from the National Nuclear Security Administration for a next-generation XC supercomputer and Sonexion storage system. At more than $174 million in revenue, this contract is one of the largest in our company's history. This new system will integrate next-generation Intel Xeon and Xeon 5 processors and is expected to deliver more than 8x greater performance of real-world applications than its predecessor, a Cray XE6 supercomputer housed at the Los Alamos National Laboratory.

We're also awarded a $54 million contract to deliver 2 next-generation XC supercomputers and a Sonexion storage system to the Korea Meteorological Administration based in Seoul. KMA will use this new system to provide more accurate forecasts through new forecasting models, increase model resolution and the implementation of advanced data simulation.

Over the last few months, we were also awarded a number of additional supercomputer and Big Data contracts from the U.S. government, totaling more than $90 million. It's really been quite a run.

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

Brian C. Henry

Thanks, Pete. And good afternoon, everyone.

Before I get to our outlook, let me first take you through our second quarter financial results.

For the quarter, revenue was $85 million, as Pete mentioned, about $10 million higher than our previous outlook. As anticipated, we reported a net loss which is -- which on a GAAP basis was $6.7 million or $0.18 per share. Product revenue for the quarter was $62 million and service revenue was $23 million. Our non-GAAP operating loss for the second quarter was $10.1 million and our net loss was $8.6 million.

As a reminder, we feel that non-GAAP measurements are the best way to look at our company and progress.

For the second quarter, total non-GAAP gross margin was 35%, made up of product margin of 30% and service margin of 48%.

Non-GAAP operating expenses for the second quarter totaled $39.9 million, about $5 million higher than last year, primarily driven by our investments in Big Data storage and analytics. Our second quarter operating results included $4.3 million for depreciation.

Inventory increased substantially in the second quarter to end at $192 million compared to $118 million at the end of the first quarter, with 29% or $56 million out at customer sites and in the acceptance process. We expect that inventory at customer sites to increase significantly as we continue to shift product for our expected Q4 acceptances. As you may know, we do not typically buy inventory until we have a contract or high probability of a contract, so rising inventory is actually one of the best indicators for expected strong revenue growth in coming quarters.

Total cash investments and restricted cash at the end of the second quarter was $212 million compared to $279 million at the end of the first quarter. And net working capital, which is generally less volatile and, we think, a better metric to track, was $300 million at the end of Q2 compared to $315 million at the end of the first quarter.

I would now like to take a moment to discuss our outlook. As a reminder, our results for any period are highly dependent on a number of variables, including a limited number of significant customer transactions, the timing of system acceptances and the availability of third-party components.

We are maintaining our outlook for 2014. While a wide range of results remains possible, we continue to expect revenue to be approximately $600 million for the year. With 10 -- with the $10 million pull-in in the second quarter, revenue for the third quarter is expected to be about $125 million. As is typical, our third quarter results are expected to be dependent on a few significant customer acceptances that are likely to come down to -- late in the quarter. Combined with our first half performance, this equates to about 56% of our annual revenue expected to fall in the fourth quarter this year. You may recall that we had a similar back-end weighting in 2013 recognizing more than 58% of the year in the fourth quarter of last year. While we have significant work left to do, we are capable of delivering on this, especially after the upgrades are made to our manufacturing capabilities.

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. Stock compensation, not included in non-GAAP gross margin and operating expenses, is expected to be somewhat higher than $10 million for the year. Other income and expenses are expected to be in the neutral to slightly negative range, dependent on a number of items, including 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 46%. Tax estimates are highly variable and dependent on a number of items. A large majority of our reported income tax provision is expected to be offset by previous net operating losses and thus will 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. Our cash and investments are expected to fluctuate significantly quarter-to-quarter but are likely to be lower in the third quarter as we continue to build inventory for acceptances expected to occur in the fourth quarter. We would expect cash to rebound significantly in the first quarter of 2015.

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 J. Ungaro

Thanks, Brian.

I want to close by giving you an update on our 2 major focus areas for the rest of the year. The first is to keep the company on a strong growth path as we target the supercomputing and Big Data storage and analytics markets. Our goal is to grow at twice the market growth rates in each of these individual markets.

We currently have 2 offerings in supercomputing, 2 in storage and 1 in data analytics. Each of these products are strong, delivering market-leading performance and excellent value propositions for our customers. As a result, we believe we are well positioned to continue to grow and take additional share in each of these expanding markets, as some of our recent wins can attest. Our pipeline also remains very strong. While we still have work left to do in order to deliver on our outlook, we're on track with where we were at this time last year.

On the development side, our roadmap includes several key deliverables for the second half of the year. The largest of these is to deliver our XC and CS supercomputers based on the upcoming Intel Xeon processors known as Grantley or Haswell. We're also on-track here, as we've been receiving these new processors and are already shipping them in early systems to various customers around the world. This is obviously a very big milestone for us as we look forward toward a substantial ramp in the second half of the year.

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. In storage, our Sonexion and TAS archive solutions provide customers with unique, scalable offerings that solve some of their toughest data management problems. We have a number of large Sonexion installations on tap for the second half of the year, as well as a planned launch of our next-generation Sonexion solution in the fourth quarter.

We also have a number of exciting new developments coming down the road in storage, and to give you some perspective on this: Our new Trinity win will include over 80 petabytes of Sonexion storage, which is more than 3x larger than any storage system we've ever shipped. As part of that system, we'll also be delivering a new ultrafast, multi-petabyte storage solution known as a burst buffer, which leverages solid-state technology to improve overall performance in a cost-effective manner. When this system is complete in 2016, it'll likely be one of the fastest storage platforms on the planet.

On the Big Data analytics front, this past quarter, we were pleased to ship the first beta installation of our upcoming second analytics product. This burst system went to a commercial customer, a large electronics and entertainment company based overseas. This was a goal that we had told you about on our last call, and we are very excited to deliver on it. This new product targeted at the Hadoop and advanced analytics market is in the final stages of development. It's designed to take advantage of our expertise in supercomputing, along with our ability to work with big and fast data, to deliver higher performance and a better TCO for analytics customers. It also nicely complements our current Urika data discovery offering.

We'll have more to talk about later this year when we expect to do a broader launch and make the product generally available in the fourth quarter.

We're continuing to see a huge opportunity in the market that is at the convergence of supercomputing and Big Data, and as part of this, we recently announced a organizational realignment. We've taken our 4 individual product groups and aligned them to create a single combined functional organization. This will allow us to better leverage different technologies from our various products into more strategic and unified offerings. You'll see a great example of this as we bring out our new analytics product I mentioned earlier.

And on the leadership side, we announced that Max Schireson joined our Board of Directors. Max assumed a role on our board as well as with our strategic technology and compensation committees. This is especially exciting for us, as Max is the CEO of MongoDB, one of the hottest Big Data analytics companies around. For those of you that don't know MongoDB, it is an agile NoSQL database being used by all types of companies, from start-ups to the Fortune 500. Max brings our team an incredible knowledge and insight of technology, applications and the Big Data analytics marketplace, having spent time at both MarkLogic and Oracle before MongoDB. We're extremely excited to welcome Max to the company.

In conclusion, I'm pleased with our progress during the first half of the year. While we still have plenty of work left to do in order to deliver on our outlook, we're in a good position as we shift focus to our ramp-up in the second half, targeting strong growth and profitability for 2014, as well as setting ourselves up to continue to grow in future years with our recent winning streak.

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

Question-and-Answer Session

Operator

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

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

So Pete, can you talk a little bit about, as you've won deals and talked with customers since the last quarter, and what's going on with IBM and Lenovo -- and obviously, I think probably anybody that doubted the market share opportunity last quarter is probably questioning that this quarter, but can -- obviously, a couple of these wins, I think, either were pretty staunch IBM labs for many years prior to this, and maybe the Lenovo transaction didn't matter. But can you just kind of touch on what you're seeing in the market? Obviously, the deal hasn't closed yet, but what customers are telling you competitively.

Peter J. Ungaro

Yes, Chad, that's a great question. IBM is our biggest competitor in virtually all of our product lines. And so they've had a pretty major shift, as far as their strategy going forward, not just with selling their x86 server business to Lenovo but also with not having a follow-on to their current Blue Gene line of products, which we also compete against in the high end. So I would tell you that I think that this is starting to shape up to be a pretty nice-looking opportunity for us overall. We're starting to have a lot of discussions with customers that have been long-time IBM accounts that are questioning about what direction that they're going to go into the future. Clearly, for those customers that are focused on kind of value in the higher end of the marketplace, I think we're going to have a really good opportunity to, hopefully, pick up. I don't think it's going to be a major impact to us in 2014, but I do think, in 2015, in 2016, as those kinds of larger contracts come up for renewal, I think we're going to have a really good opportunity there. I don't expect IBM to lay down. They're a very tough competitor, but I do expect us to have a little bit of an edge overall in competing with them in the future, which I think is going to really help out our growth story.

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

Okay, good. And then on the storage side, Pete, can you touch a little bit on the product roadmap there? I think you hinted towards a next-gen Sonexion product in the fourth quarter, but just kind of looking out into '15, are we still focused on utilizing people like Xyratex throughout the product lineup? Or are there other products we can offer on the storage side that maybe are higher up the value chain?

Peter J. Ungaro

Yes, that's a great question, Chad. Our storage game plan has really gone through a few stages. We started out reselling other people's storage. Now we're in a major OEM partnership with Xyratex, now Seagate, with our Sonexion line. And we do, we have some nice follow-on products for that. All along the way, what we've been doing is building more kind of IP and more direct Cray differentiation on top of those products as we bring them to market. And you start to see things like Tiered Adaptive Storage or TAS where we're bringing out new solutions in new spaces like the archived space for data management. But I mentioned our Trinity win as a good example of our storage roadmap because what you start to see in there is products that are still based on technologies that we get from Xyratex but also more and more based on our own technologies and around that marketplace. So our burst buffer technology, for instance, that I mentioned will be a Cray-developed technology that we'll be delivering to the Trinity solution. So more and more, you'll continue to see us move up the value chain there but have a breadth of storage offering for both the high-end -- high-performance customers as well as the high-end Big Data analytics customers.

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

Okay. Last one for me, just on the new Big Data product focused more on Hadoop and advanced analytics. Great to see the kind of initial beta customer has the product. What are the expectations, whether it's for beta customers, by year end, or some other metric there or target? And then should we expect this product to be material to '15 from -- well, material to the Big Data business to '15? And then I'll jump off.

Peter J. Ungaro

Yes, Chad, great question. So we're super excited to hit that milestone. It's -- we're very excited about getting our kind of second major analytics product out in the marketplace, and so it's a big milestone for our development efforts. We're likely to bring on, over the course of the rest of the year, a couple more beta customers. We don't typically do very large beta programs. We don't see a lot of value in that -- in those, but we do see value in getting them out to a couple of customers. So probably over the course of the rest of the year, you'll see a couple more early customers added to that. And -- but really, the launch is for the end of the year. So it's really about 2015 for this product, for us. And I do think, as far as our Big Data analytics revenue goes, I think Tahoma [ph] will be a significant part of that -- the new product, sorry. The new product will be a significant part of our Big Data revenues in 2015.

Operator

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

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

Just first, on thinking about the fourth quarter here, guys. So you have record amounts of, it looks like, finished goods in your 10-Q here for your -- for second quarter period. And it looks like you have like 4 customers of roughly $76 million in finished goods. So can you just give us a little bit more detail about the pipeline for fourth quarter, just help people get a little more comfortable with how much progress you've made against that fourth quarter number versus 90 days ago, and what sort of the risk factors that are involved in that?

Peter J. Ungaro

Yes, Alex. I'll start, and then I'll ask Brian to jump in and give you a little view of the inventory perspective of it. So I mentioned earlier that, as far as getting the wins that we need to close out and get to our number this year, we're on track with where we were last year at this time. So we feel really good. Last year ended up pretty good for us, so we feel pretty good about where we are from that perspective. We still have some deals that we got to win. We have a number of opportunities out there in the market that are going to be decided on over the next few weeks and couple months that are really important for us for this full year. So first step is we got to get all the orders done. We're in great shape right now, but we've still got to close out here and get a few more orders to get where we need to. And then we have a pretty big ramp: Third quarter, we were able to pull in a little bit of that revenue into second quarter. The third quarter starts to build, and then a lot of systems will be shipped in the third quarter for our fourth quarter installations and acceptances. And one of the big things is a lot of those fourth quarter acceptances are based on this next generation of Intel processor known as Haswell. And I mentioned that we've already started shipping that, systems based on Haswell, out the door. So we're pretty excited that, that's already started and we have that pump primed, more or less. We also, of course, upgraded our manufacturing facilities and kind of doubled our manufacturing capacity. So I think we're in a bit even better shape right now this year than we were last year, as far as being able to get systems out the door quicker and then get them into installation and acceptance tests. Brian, you want to comment on the inventory insight?

Brian C. Henry

Well, yes. And in fact, a fair amount of that finished goods that hadn't yet gone to customers has now gone out. As we indicated, we began shipping Haswell-based systems recently, at least early shipments to customers. Working out build inventory. More of it will be, as a percent, in at customer sites going into the fourth quarter, for those acceptances. And then we'll end the year with a lot lower inventory as we finish the year out.

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

So if we look at this guide for the third quarter, guys, this was $125 million. If you were -- just if you were to isolate for the services and just look at the product, how much -- or maybe you can look at the whole number. How much of that already been orders won and it's just a matter of shipping in rev racking for the third quarter? Is that a pretty high percentage for...

Peter J. Ungaro

It's 100% basically. So we -- for third quarter, Alex, we have all the orders in house. We're shipping them. The majority of our third quarter revenue is based -- the vast majority of it is based on systems that we've been shipping in the market for a while. So it's just a matter of getting them in and getting them done.

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

All right. That was an important piece of information. And then just to finish up on this topic then I have one more last question for you, Peter, is: Last quarter, you talked about 4, 5, I think, key deals for the fourth quarter that you needed to close to make the number and potentially put yourself in a position to beat the number for the year. It sounds like you've already closed a couple of those and you just narrowed down to maybe 2 or 3 that need to close for that fourth quarter to make, along with transactional business.

Peter J. Ungaro

Yes, I mean we have a few more big deals that we want to close for the year. And then we got a number of smaller ones, right, that we -- out of a bunch, we need a few, right? So that's kind of what we -- that's the way I would give you that perspective, Alex. So we've definitely made progress on that over the last -- I mean I would say the last 3 months have been 3 of the best booking months that I can remember in our company, and hopefully, that continues for us, but -- so we definitely made progress but we still got -- I do want to make sure that you guys appreciate we still got more that we have to get done to get to our number.

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

No, I appreciate that. So my last question for you guys right now is Intel announced their Omni Scale product. And we're starting to get some questions from investors, I think, rightfully so, about what the future of Cray's gonna look like a couple of years from now when the XC30 runs its course, maybe at the end of 2017. And I think, ultimately, the real question is what -- in the world of Omni Scale, what does Cray look like? Where is the value add? Can you maintain similar margins? Can you maintain similar revenue profile? If you're -- if it's not, per se, your interconnect, maybe you're allowed to continue to develop Aries. So if you could just comment on that for a few minutes, that would be great.

Peter J. Ungaro

Yes. And just for those of you that aren't aware, so Intel announced Omni Scale, which is their next-generation system interconnect very similar to, like, our Aries interconnect that we use with our XC30 or an InfiniBand interconnect that we use with the CS300. We've been very close. We're obviously very close partners with Intel. We've been following the Omni Scale development with them for a long time now, and we plan on supporting Omni Scale in our CS300 clusters. We think it's going to be a very good technology. Today, we actually support 2 interconnects in our CS300: both the Mellanox InfiniBand interconnect and the Intel True Scale interconnect. And we think Omni Scale is going to be a really good alternative to True Scale, and we'll see how that plays out. In our high-end systems, the XC30, we still will plan on supporting Aries through this time frame. So I see Aries as being a very strong interconnect for us for the next 3 or 4 years or so and as we go forward. Aries is quite far, I think, ahead of the field right now, especially at scale and in various data-intensive type of workloads, which it was designed for. So I see that as being very -- a nice, long roadmap for us in our high-end products as we go forward. Longer term, we'll continue to work with Intel and Mellanox, as well as ourselves, as far as developing system interconnects at very high scale and we'll put those into our product lines over time, but now we're getting out quite far in time, maybe 2018 or 2019, a time like that [ph]. So that's why I don't want to comment too much on that, but I feel like we're in a great position to continue to grow our differentiation on our systems through this time period. So I do feel we're going to, hopefully, not only hold our gross margins through this time period but actually increase them, Alex.

Operator

Your next question comes from the line of Rich Kugele from Needham & Company.

Richard Kugele - Needham & Company, LLC, Research Division

A few questions. First, let's just talk a little bit about, on the storage side, the Sonexion deals, where you're going into environments that are not Cray footprints. We're hearing that, that business is going quite well. So if you could elaborate a little on that. And then I have a couple of follow-ups.

Peter J. Ungaro

Yes, Rich. That's a great question. So one of -- the first premise of our storage business is make sure that we're getting as high a percentage of the Cray attach rate that we can, and we're definitely been doing that. You see, I think, a much higher percentage of our wins are coming with Cray storage than non-Cray storage, which is great for us. But the bigger part of the market and probably the most strategic for us is to get outside of that and start attaching to other people's systems. And we've had pretty good success there. We have a few very large customers now that have shifted very large environments to Cray storage, connected to not only Cray systems, in some cases, not even Cray systems, but IBM and HP and systems from a broad range of vendors around. So that's been a nice-growing part of our market. More and more, you're starting to hear of -- even within our own solutions, of people buying multiple systems but one storage environment. And so they want to have all their data in one place feeding all of their big systems and being able to access their data from all their different systems. So it's really, I think we have a great solution for that space. And as we brought out Tiered Adaptive Storage, we actually are bringing a much bigger value proposition to the customers because, then, we don't just manage the data in a high-performance way, we can start to migrate that data off to slower storage to tape. That's much more cost effective for them. So we're able to allow them to tier that and really manage their data through a whole life cycle. And so that's -- I think we're -- our value proposition there for those customers is really improving nicely. And we'll continue to improve as we roll out our roadmap over the next couple of years.

Richard Kugele - Needham & Company, LLC, Research Division

That's helpful. And then just to understand your win rates a little bit better. In situations where you're the incumbent or you've won perhaps one of the sister deals, how often do you win the follow-on business, just as a general rule? Is there a general rule?

Peter J. Ungaro

Well over 90% of the time. So it's -- with our high-end systems, it's probably even higher than that, but let's say well over 90%.

Richard Kugele - Needham & Company, LLC, Research Division

Is it similar for other competitors? And is it just one of those industries that tends to be fairly sticky? And, as these deals do come up, is looking at who is the incumbent, really one of the greater barometers, and perhaps maybe just these situations like IBM-Lenovo where you kind of have an opportunity for share shifts? Or just trying to understand...

Peter J. Ungaro

No, not really. And yes, Rich, sorry to jump in, but not really, I would say. I think, actually, our industry is one that isn't really tied down to incumbents because there's typically middleware that allows the software to be very portable from one system to another. And so that gives you a really good opportunity to get quick share gains. So if you have a very compelling product, you're able to get into a market and get quicker share gains, and I think you're seeing that today from us with the XC30, with our CS300 as we're starting to get into the market in a bigger way in that way. But one of our advantages is we've been able to really keep our customers. So we're not losing so many on the back end and we're gaining from others. So that's really been a huge part of our growth story. It's being able to form a partnership with our customers and really have very high customer retention rates. And I'm -- I'll tell you, when I talk with customers, that's one of the biggest things that I talk about, is why we can retain customers for the long haul. And it goes a lot more to our real kind of underlying technology and our service and support of the customer, much more than it is about our scale and our speed and all of that at the end of the day because, when they go into production, those things become a lot more important and they start valuing those things a lot more. And we're very strong in those areas.

Richard Kugele - Needham & Company, LLC, Research Division

Excellent. And just one last question. Obviously, your sales force still does have a little bit of work to do here in the fourth quarter, but much of the focus is probably also on '15 given the lead times. So can you just discuss a little bit more about the pipeline, how that's building up, maybe any notable demand commentary between the mega deals versus smaller ones or even XC versus CS? Any preliminary thoughts there?

Peter J. Ungaro

Yes. So yes, they better not be golfing yet. They -- we've still got some deals we have to -- we got to close this year. But yes, our -- we've been on this nice run of wins. And $400 million of orders in just the past few months, that span '14, '15 and '16 primarily. I mean a great start for us. And we usually don't get started this quick in future years, so that's great. But our pipeline, as we look at it, and really almost in every geography that we have, and we split up into 4 different geographies around the world, our pipeline's been growing. It's been growing across our products pretty nicely. And we're starting to see a lot more balance. If you look back probably 3, 4, 5 years ago, it was really about the mega deal. That was really about the things that drove a year for us, is 1 or 2 deals was a huge percentage of our year. If you look at even this year, last year, to some extent, even more this year and, I think, even more in future years, you're starting to see much more balance, a lot more transactions that are going through, a lot more revenue split up across a broader set of transactions, which I think is a healthier way to grow the business. Now we still have a mega deal sprinkled in there. The Trinity win is a great example of that. But I kind of see those as starting to be things that can really get us to the next level and help us to even increase our growth rates versus being dependent on those. So it is a -- quite a different shift, I think, over the past 3, 4 years as we've really built out, I think, a stronger portfolio of products and a broader penetration into the market.

Operator

[Operator Instructions] Your next question comes from the line of Sid Parakh with McAdams Wright.

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

So a question on Big Data. Can -- a lot of your competitors on the Big Data side of things are not going to be your traditional customer. I'm guessing IBM is still going to play a role, but can you frame the whole Big Data competitive environment in a framework that kind of tells us where you're situated relative to maybe some of the established players? And just kind of trying to think about how we, as investors, should think about the progression of that business from a revenue perspective as we move over the next 2, 3, 4, 5 years.

Peter J. Ungaro

Sure, Sid. I would say the Big Data -- the analytics market, let's talk specifically about the analytics space, which I think what you're referring to, versus storage. The analytics space is it's not really -- I kind of almost laughed a little bit when you said established players. I really don't feel like there is established players yet in the Big Data market. I think you see companies that are starting to carve out a significant position, a Cloudera, a MongoDB, an IBM, for instance, that are starting to -- Oracle I'd throw into there -- starting to carve out a space. But I think the market still is very new, and people are still in a stage of trying many different technologies. So what we're finding with Urika, as we're in the market with Urika right now, is that, customer to customer, kind of the competition is very different. In many cases, it's there's none. They're not doing what Urika is capable of. And so you're selling a unique capability and building a business case with the customer around that capability. In some cases, they're looking at trying to do -- stretch other technologies to do that work. "Can you stretch Hadoop with other tools and programming models on top of it to do some of that capability?" and things like that. So I really feel like it's a market that doesn't have a lot of established competition in it. And for our focus, what we're trying to do is look for those customers where scale and high performance matters. That's why we talk a lot about fast data, not only Big Data but data that you -- is much more real time and that you have to act on and it's very important to act on very quickly and where you need advanced analytics capability, not just basic analytics. So that's really where we're trying to focus and where we're starting to play. And we're doing that with Urika and we're starting to do that with our next-generation -- our second product, I should say. It's not next generation because it's complementary. It's complementary to Urika. I do still think, though, in this analytics space, it's a smaller business for us right now. We're investing a lot in it, as you know. I still believe that we have amazing potential in this market over time. It's something that we're trying to double this business every year. And I think we are really on track to be doing that, especially as we bring on the second product. I think next year will even be probably an even larger step function in our revenues than we did -- than we'll probably end up this year, with 2 products in the market instead of just 1. So I feel like we're really starting to make some good progress in the market from that perspective, Sid.

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

Fair enough. And another question, on just kind of the longer-term margin outlook for the company. I mean what's happened over the last few years is you've gotten a lot more revenue dollars starting to flow in. And what -- just from a longer-term perspective trying to think about how every incremental revenue dollar is likely to convert into margins and even cash flows or free cash flow over time. So just some general color around what to expect, say, if you were going to be a billion-dollar company in 3 to 5 years, what should that mean to margins?

Brian C. Henry

Sid, we have a goal to improve our margins. And we think that can happen on the gross margin line. Some of that will be dependent on mix, with the clusters carrying a lower margin than our traditional margins. But with -- despite that, we think we can grow gross margins with the mix and improvement in the business in Big Data and storage, et cetera. And then we think we can grow operating expenses slower than revenues and, therefore, create leverage there. So our long-term goal is to approach 10% in operating margins from where we are today, and I think we'll make progress over the next few years in doing that. The 10% will be hard for our industry, but we think it's doable with our competitive position and product portfolio, but that's not going to happen overnight unless we grow extraordinarily fast.

Operator

And we have no further questions at this time. I would like to turn the call back to our presenters for closing remarks.

Peter J. Ungaro

Thank you.

I'm pleased with our performance in the first half of the year. We're winning some of the largest opportunities out in the market today, positioning ourselves to have a strong 2014 and continued success going forward.

Thank you, all, for joining the call today and for your continued support of Cray. Have a great evening.

Brian C. Henry

Thanks, everyone.

Operator

And this concludes today's conference call. You may now disconnect.

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