Silicon Graphics International CEO Discusses F4Q2011 Results - Earnings Call Transcript

Aug.18.11 | About: Silicon Graphics (SGI)

Silicon Graphics International Corporation (NASDAQ:SGI)

F4Q2011 Earnings Call

August 18, 2011 5:00 pm ET

Executives

Jason Golz – IR

Mark Barrenechea – President & CEO

Jim Wheat – SVP & CFO

Analysts

Brian Freed – Wunderlich Securities

Alex Kurtz – Sterne Agee

Shebly Seyrafi – FBN Securities

Tim Quinlisk – Mayo Capital

Mike Shinnick – Wasatch

Operator

Good day, ladies and gentlemen, and welcome to SGI’s fourth quarter and fiscal 2011 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions following at that time. (Operator instructions) As a reminder, this conference is being recorded. And now I’ll turn the call over to Jason Golz, Investor Relations for SGI. Please begin.

Jason Golz

Thank you, Tyron. And good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2011 financial earnings results. On the call today are Mark Barrenechea, SGI’s CEO, and Jim Wheat, SGI’s CFO. Our fourth quarter and fiscal year 2011 financial results were released just after today’s market close. Our press release and earnings slide presentation are available on the IR section of our website at investors.sgi.com.

We have arranged for an audio replay of today’s call, which will also be available for five days. A replay of the webcast will be available two hours after the conclusion of the call and will remain available on our website until the next call. The date of the call today is August 18. This call is property of SGI, and any recording, reproduction or transmission of this conference call without the expressed written prior consent of SGI is strictly prohibited.

Before I turn the call over to Mark, I’d like to call your attention to the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today’s earnings call includes forward-looking statements and projections, including financial projections for fiscal ‘12, market growth projections and product development plans.

There can be no assurances that we will achieve these projected results, and we ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these projections. We do not undertake any obligation to update our forward-looking statements except to the extent required by law.

To obtain copies of our latest SEC filings, please visit sec.gov or visit our website at investors.sgi.com. Additionally, we note that we continue to use and refer to certain non-GAAP measures. The non-GAAP figures that we present on today’s call are also contained in our earnings release along with a reconciliation to the applicable GAAP metric.

We are pleased to let you know that SGI will host an Analyst Day on September 22 in New York City, where management will be on hand to discuss SGI’s strategy and growth trajectory. We are excited about our presentation, and we look forward to meeting many of you. Additionally, SGI will be presenting at a number of conferences next month.

We will be at the ThinkEquity Growth Conference on September 13 in New York City, the Deutsche Bank Securities Conference on September 15 in Las Vegas, and the Credit Suisse Small and Mid-Cap Conference on September 27, also in New York City. Please join us via webcast if you are unable to attend the conferences.

I would now like to turn the call over to Mark Barrenechea, SGI’s CEO. Mark?

Mark Barrenechea

Thank you, Jason. And welcome, everyone, to our fourth quarter and year-end earnings call. This is certainly an interesting data at an earnings call with many companies downgrading growth and earnings. This is not our view of our world. We grew revenues in fiscal 2011 by 22%, and we expect to grow revenues up to 24% in fiscal 2012 while growing our earnings. Let me get into the details.

Fiscal 2011 was a pivotal year for the new SGI in so many years. It was a successful financial year with record revenues, right-line non-GAAP profitability, growth at near three times the market rate, cash growth, and a debt-free balance sheet. Looking beyond our financial results, it was an even stronger year of customer successes, new product introductions, expansion of our worldwide delivery capabilities, while building the framework as we strive to reach our first $1 billion in annual revenues. Our employees are customer-centric and passionate about being the trusted leader in technical computing. Unlike anything I have seen in the industry, their dedication is unparalleled.

Let me highlight our non-GAAP results for fiscal 2011. Our revenue grew 22% to $642 million, gross margin improved to 92.2%, achieved EPS of $0.55, and we ended the year with $143.2 million in cash and debt free. On today’s call, I’ll look back and make a few observations about our industry and our business. I’ll then turn the call over to Jim so he can provide more details on our financials. And finally, before taking your questions, I’ll provide a look-ahead on what we see on the horizon.

As we look back on fiscal 2011, several things have become clear. First, we are in the right industry. Second, we have the right strategy. And third, we have executed and have the right leadership and have a performance-driven culture to continue to execute and scale.

Let me comment on the right industry. The technical computing industry lies at the end of the spectrum where customers demand speed and scale over all other factors. This is because the applications they run are their business compared to the other end of the spectrum where applications are used to support their business.

Products and services in the technical computing space sell based on their speed, their ability to rapidly scale and produce better products. Enabling general ledger or accounts receivable or order management has little to do with creating a great company or great product. Enabling a safer or more energy-efficient car or finding the next 100 years of energy reserves or accelerating drug design for a healthier and more sustained way of life has everything to do with creating a great company or product.

The current technical computing industry dynamics are favorable because we are on the leading edge of a trend where more and more things are being modeled or simulated in a computer. Everything from potato chips to nuclear arsenals are modeled on a computer. The total market is large, $19 billion, and growing at 8% per annum. SGI is in the right industry.

Let me comment on the right strategy. The technical computing market is large, relevant, growing, but fragmented. The main technology areas include compute, storage, software and services. Our strategy is to focus solely in technical computing, continue to build or acquire key components and be the trusted integrator across the solution stack, whether it is an SGI component or a partner’s.

SGI is unique in such that we have the know-how, talent and focus to act as this trusted integrator. This allows us to focus on what we are good at, the solution, and allows the customer to focus on what they are good at, their product. The success of our strategy is evident in the strength of our fiscal 2011 results. We have taken and will continue to take multiple paths to grow SGI. This includes three main areas today. The introduction of new products and services; expanding our share in existing markets, number two; and number three, strategic acquisitions.

First, I’d like to talk about the successes we experienced from new product introductions. In fiscal 2011, we introduced Altix UV, ArcFiniti, InfiniteStorage 5500, ICE Cube Air, and Management Center, just to name a few products. On the horizon, it’s a transition to Intel Romley for entire compute product line and the next generation of UV, Altix ICE and Rackable.

We will continue to widen our leadership in shared memory. We enter the highest end of our cluster market against Cray and IBM and deliver larger, more efficient clouds. SGI is the only company that can offer customers architectural completeness with shared memory, scale out InfiniBand and scale out Ethernet under one integrated product family.

Further, our in-line and persistent storage platforms integrate into our compute products, leveraging both our file system and file virtualization technology. For fiscal 2011, storage was 21% of our product revenues.

Second, as it relates to our multiple paths to growth, we continue to grow share in existing markets. We are focused in continued productivity gains in our major geographies of Europe, Americas, US Federal, APAC and Japan. We continue to increase our vertical capabilities within public sector, manufacturing, cloud, oil and gas, media and biosciences.

We are investing in emerging markets such as India, China, Brazil and Russia. Channel and strategic partner alliances remain a focus as well. For example, we are working with Microsoft to scale SQL Server to new heights. We expect that when Microsoft Denali is GA, it will have full UV support. And as we look into fiscal 2012, we expect to grow our sales force by 10%.

Let me also spend a moment on Japan and US Federal. Despite macro concerns and with our current visibility, our fiscal 2012 plans show revenue growth in both Japan and US Federal. As for Japan, we are well positioned as the Japanese government invests in key heavy industries, research, science and government-related programs. As for US Federal, our product and services are highly differentiated in intelligence, defense, key civilian agencies and research organizations.

We also tend to be engaged with longer-term missions that are not completely immune, but certainly seen less vulnerable to yearly budget fluctuations. And we have no state and local exposure. In fiscal 2011, we grew our public sector business by 20%. Once again, our fiscal 2012 plans show revenue growth in both Japan and US Federal.

And as for our third growth path, strategic acquisitions and integration will remain a core component of our strategy. Over the last two years, we have acquired Silicon Graphics, COPAN, SGI Japan, and most recently, OpenCFD. Each of these acquisitions were unique in their situational position, immediate needs and long-term potential. However, we saw an opportunity in each. And we knew we had the talent and know-how to integrate these businesses and put them on a different trajectory.

We have created a core competency in acquisitions and their integration. Factoring in these multiple paths to growth over the last two years, we have more than doubled our revenue and transformed our gross margins while achieving non-GAAP profitability on roughly an unchanged share count, all while maintaining a healthy, debt-free balance sheet. This is simply not to the profile of a typical acquisitive company.

Let me spend a moment on our most recent acquisition, OpenCFD, which we closed on August 8. OpenCFD is the provider of OpenFoam, the leading open source application for computational fluid dynamics, a.k.a. CFD. CFD codes are among the most popular application segments within technical computing. We see an opportunity to change the landscape of fluid dynamics by providing an integrated CFD solution and expanding the availability of CFD codes.

We will bring to our customers a variety of options. First, an integrated and optimized CFD solutions consisting of our hardware, software and services; two, trusted production binaries through a subscription fee service; three, professional services for migration, training and new solvers; and fourth, a community version of OpenFoam. The main pieces of our software stack now include OpenFoam, Management Center, Performance Center, DMS, our Filesystems, and a variety of other partner products. We see additional opportunity in other application areas over time.

Let me then move on to and comment on right execution. Customers have come to trust SGI. The culture we are building is to be the most trusted people in the lives of our customers. That trust intersects all the touch-points across the company, from solutions we design and deliver to support in back-office interaction to a secure and trusted supply chain. It is on this foundation of trust that we service our marquee customers.

Amazon, as they expand their services; NOAA and Norwegian weather as they provide solutions to improve our environment; Boeing, as they deliver new aircraft vehicles; US Army and US Air Force, for national defense; BMW, Skoda, Chrysler, Toyota, Tata, as they deliver safer, more efficient vehicles; 3M, in product quality; China’s State Grid, for national power optimization; Total, for energy exploration; NASDAQ, for reliable high-volume transactions; and the Atomic Weapons Establishment, AWE, for nuclear deterrents; and so on. Our customers have come to trust SGI.

Fiscal 2011 was a pivotal year for us. We successfully introduced world-class products, significantly expanded our global footprint, provided solutions to marquee customers, and established a new baseline for the company.

With that, I’ll turn the call over to Jim.

Jim Wheat

Thank you, Mark. By now, we hope you’ve seen our earnings release and presentation, both of which can be found on the IR section of our website. Let me summarize our financial performance at a high level and discuss some key updates. Consistent with our practices over the last couple of years, we will discuss our fourth quarter and fiscal 2011 financials in non-GAAP terms. However, starting in fiscal 2012, we will simply our reporting process by providing guidance and presenting our financials on a GAAP basis, although we will continue to provide guidance on non-GAAP EPS. We will no longer be providing guidance on non-GAAP revenue and non-GAAP gross margin.

Key highlights from this past quarter were non-GAAP revenue growth of 40% quarter-on-quarter; for the full year, non-GAAP revenue growth of 22% compared to fiscal 2010; three consecutive quarters of non-GAAP profitability; continued disciplined approach toward costs; cash from operations of $21.2 million; cash increased $9.4 million in Q4; ending cash balance of $143.2 million; and we are debt-free, having retired the debt acquired with the SGI Japan acquisition. To find detailed comparisons with prior periods, please refer to the accompanying slides on the IR section of our website.

Moving on to our revenue mix, all of our key metrics were in line with our expectations. On a non-GAAP basis, products represented 73%, services were 27%. By product line, compute was 82% and storage was 18%. Public sector contributed 53%, manufacturing was 17%, and cloud was 16%. Domestic was 53% and international was 47%.

We continue to be disciplined with our costs and expenses, which is an important and significant differentiator between the new SGI and the old Silicon Graphics. In fact, not only is it a differentiator, it is in our DNA. This management team cut its piece operating in a lower margin business at the former Rackable. And this skill set has transferred to the new SGI. As we invest in innovation, world-class products, and sales coverage expansion, we will continue to work to achieve these objectives by growing profitably.

Looking back on fiscal 2011, I am pleased to say that we have executed about and beyond each of our focus areas for the year. Once again, we did what we said we would do. We delivered on our fiscal 2011 financial plan by meeting or beating the high end of our guidance on all metrics.

As I have said consistently over the past several quarters, we balance being fiscally responsible with investing prudently and intelligently in our business, in sales, new product development and in geographic expansion through a combination of investing and acquiring remarkable assets at attractive prices. For example, witness our game-changing acquisition of SGI Japan in March and most recently our acquisition of OpenCFD, bringing to our customers the market’s only fully integrated CFD solution where all the hardware and software work together.

As we look ahead to fiscal 2012, I want to focus on our exceptionally strong financial model and would like to walk you through slide 16 of our investor presentation. And I’m going to pause for a moment so that you can open up to that slide. Our multiple paths to growth continue to expand through our crisp execution in developing and bringing to market new products through sales force expansion and through acquisition.

Our focus on gross margin improvement and solid operational execution, which Mark and I hammered home consistently in fiscal 2011, continues and the opportunities in fiscal 2012 are at least as strong as they were in fiscal 2011. Further, we continue to live in a relatively low CapEx environment. We own and manage our own manufacturing and supply chain operations located in the US, with low cost expansion capability available to us. And to top it all off, our $466 million of NOLs will minimize taxable income, especially in our high tax rate countries well into the future.

Let me turn now to guidance. We are initiating guidance for fiscal 2012 on a GAAP basis, but we will also present our EPS on a non-GAAP basis. In fiscal 2012, we expect revenue of $740 million to $780 million, gross margin of 28% to 30%, GAAP EPS of $0.15 to $0.30, non-GAAP EPS of $0.60 to $0.80. As a reminder, we have provided the necessary reconciliation from GAAP to non-GAAP in our earnings release.

Now, let me turn the call back over to Mark.

Mark Barrenechea

Thank you, Jim. I spend a significant amount of time with our customers. Let me spend a moment on the three trends that are in the minds of our customers that is placing SGI in many strategic discussions. First, modeling and simulation using computers will become ubiquitous, as many core comes to fruition. Second, data sets are rapidly growing and customers are only beginning to adopt big data solutions. But customers what solutions that are open and cost effective and not proprietary.

Third, customers want flexible deployment choices, on-premise, off-presence and in the cloud. SGI is at the intersection of these trends and is well positioned for these customer discussions with the strongest leadership team we’ve ever had; a performance-driven culture; well-established core competencies; world-class products and services; a favorable competitive environment with high barriers to entry, including over 600 SGI patents; a proven track record of trust and execution; and a great foundation upon which to continue to build.

As Jim highlighted, with our fiscal ’12 guidance, we believe we can grow the business up to 24% and improve our GAAP EPS by nearly $1, while making key investments as we strive to reach our first $1 billion in annual revenues.

I’d like to personally close by inviting each of you to attend our Analyst Day in New York City on September 22. We are excited about the materials we plan to present to you at our Analyst Day, and we look forward to spending more time with you. I hope to see you there.

With that, I’d now like to turn the call over to the operator and open the line for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Brian Freed of Wunderlich Securities. Your line is open.

Brian Freed – Wunderlich Securities

Congratulations on a great quarter. Couple of quick questions. One, just as a reminder, you guys are moving to GAAP guidance. Is that primarily a function of the difference between GAAP and non-GAAP is converging to a point where it’s not that material?

Jim Wheat

Hey, Brian, it’s Jim. Nice to talk to you. Yes, that’s correct. You look at our full year results, there was a very minimal difference in GAAP revenue and non-GAAP revenue. So that’s right.

Brian Freed – Wunderlich Securities

Okay. And then secondly, as I look at the model, it seems like there could have been a little bit more room for leverage, not that wasn’t a pretty good quarter anyway. But as I look particularly at the G&A line, it expanded more than it typically does. Can you talk about what incremental costs were kind of embedded in that line?

Jim Wheat

At the end of any given year, we incur certain end-of-year cost. I’ll give you example. We had a great quarter, as you know, in terms of revenue. So commission expense, which is variable with revenue, was going to be a little bit higher, was a little bit higher in Q4 than in prior quarters. I think things of that nature.

Brian Freed – Wunderlich Securities

Okay, great. Great. And then if you look at the acquisition of OpenCFD, can you talk a little bit about the timing for products in terms of integrating them and getting them to market?

Mark Barrenechea

Brian, I’ll take that one. This is Mark. So, OpenCFD had just brought their latest product to market called OpenFoam 2.0. And we actually have many joint customers together. So the product is immediately available. So we’re immediately going to market with an integrated solution of our scale-out InfiniBand, their CFD package, plus our Performance Suite, particularly what we call SGI MPI as an integrated solution. And customers are free to begin downloading the subscription service. So we’re going to market immediately. It will take us a little time to scale up our professional services that we see as an opportunity. And we’ve also put OpenFoam out on Cyclone as well, for if customers don’t want to deploy on their premise, they can deploy on ours.

Brian Freed – Wunderlich Securities

Okay. And then my last question, I’ll seed the floor and maybe come back in, you mentioned that you have about 600 patents currently. If you think about the value of patents, particularly in respect to Google buying Motorola Mobility and the Nortel patents that went for something in the range of 75,000 a piece, how do you think of the value of that patent portfolio? And do you view it as more defensive versus a particular means of monetizing it?

Mark Barrenechea

Yes. There’s a lot that goes in patent strategy. The best offense in patents are always a good defense, and a defense you don’t want to put on the field unless you really have to. Where we’re particularly strong in our patent portfolio is around shared memory and scale-out compute, which we think we’ll continue to differentiate UV in the market for the long-term.

Brian Freed – Wunderlich Securities

Okay. Great.

Operator

Thank you. The next question is from Alex Kurtz of Sterne Agee. Your line is open.

Alex Kurtz – Sterne Agee

Yes, thanks. Can you guys hear me okay?

Mark Barrenechea

Yes, Alex.

Alex Kurtz – Sterne Agee

Great. Congrats on the quarter here. So, Mark, NetApp reported last night a disappointed quarter in the public sector space; and here you are, I think, growing your public sector revenue, your federal revenue, probably like $30 million. I know that’s not all US, but can you just sort of talk to us about why your business is expanding in the federal space when everyone is talking about contraction in the federal space?

Mark Barrenechea

Sure. If we look at our business, it touches a handful of sectors and doesn’t touch other. So we’re primarily in, again, the intelligence, defense, key civilian agencies, as well as the university sector. And that’s how we define public sector. We’re not in state and local, which typically is 30% or so of a public sector category. So we don’t have that exposure. Secondly, we tend to be in longer term programs and longer term missions. So when we deployed the year or went into a program or mission, it’s a multi-year approach. Third, we have key new opportunities in civilian agencies. We’re competing better at the higher end of HPC in the market. And when you factor all those things in, plus a differentiated product, really match to the mission need today, we think we’re going to do pretty good.

Alex Kurtz – Sterne Agee

Okay. Turning to UV for a second, do you want to break out UV as a percent of product revenue at this point?

Mark Barrenechea

No, not at this point.

Alex Kurtz – Sterne Agee

I know you mentioned 500 customers I think in the press release. I think that’s similar to what you had talked about earlier, maybe a month or two ago. Do you have a number as of today of how many UV customers you have – or UV systems?

Mark Barrenechea

We didn’t update the number from the previous release. Maybe it’s another, I don’t know, 40 to 60 customers. So it’s slightly higher than probably the previous press release we’ve put out.

Alex Kurtz – Sterne Agee

Okay. Jim, just a follow-up on Brian’s question about the non-GAAP revenue. So, are you basically saying that the GAAP revenue would – basically there won’t be maybe more than a 10% difference or a less than 5% difference between GAAP and non-GAAP difference? How – can you sort of narrow the difference that we might see as we sort of think about the model?

Jim Wheat

Yes, Alex. The difference frankly is de minimis. And you could start to see that if you look at the last couple of quarters of results. This is the right time and the right place to move to GAAP revenue.

Alex Kurtz – Sterne Agee

And on the non-GAAP gross margin front, Jim, should we also assume that’s a similar kind of – like the 28% to 30% that you’ve guided to, would be similar to a non-GAAP range for gross margin?

Jim Wheat

Yes. You know, where we’ll pick up any differences is Mark and I are going to still continue to talk about non-GAAP EPS for the year as well as GAAP EPS.

Alex Kurtz – Sterne Agee

Okay. But just to be clear, you will continue to break out the stock-based comp out of your cards right and we can get to a non-GAAP gross margin number, right?

Jim Wheat

If you are interested in it – we are going to be talking about a non-GAAP gross margin number, but if you are interested, you will be able to break out the components for sure. It’s just like –

Alex Kurtz – Sterne Agee

Okay. So, yes, I’m interested. One last question and I’ll jump into the queue here. Mark, can you break out the products and services COGS?

Mark Barrenechea

I’m going to hand that one to Jim.

Alex Kurtz – Sterne Agee

Sorry. Did I say Mark? I meant Jim.

Mark Barrenechea

You got it right.

Jim Wheat

So why don’t we start – if you look at investor debt, let’s just calibrate everybody. Product revenue for the quarter was 73%, service was 27%. And now that we’ve completed the fiscal year, we might as well just fill in the whole thing and talk about the year. On a fiscal ’11 basis, that percentage roughly holds for the year as well. So I think 73%, 27-ish in terms of revenue. In terms of – let's talk in terms of gross margin. If you pull up our Q, Alex, from our third quarter, I think our service gross margin for nine months – I forgot where the footnote is, but you can find it – was 47% and the product was 22% for the full year. It will be – service is just slightly less than that. But it will be – the relationship is pretty close.

Alex Kurtz – Sterne Agee

So, around 46% to 47% service gross margin for –?

Jim Wheat

Yes, maybe just a touch under that, but in that range. Mid-40s, as we’ve said consistently during the year for our service business.

Alex Kurtz – Sterne Agee

Okay. And then I can back in the product. Okay.

Jim Wheat

Correct.

Alex Kurtz – Sterne Agee

Thank you.

Operator

Thank you. The next question is from Shebly Seyrafi of FBN Securities. Your line is open.

Shebly Seyrafi – FBN Securities

Yes. Thank you very much. Congratulations as well. So, I’m curious about – I know you’re providing only annual guidance. But there’s a lot of concern about this air pocket that a lot of people are seeing. Dell signed in mid-June and NetApp in mid-July. And I know you talked about not saying we have some federal, but there are some macro concerns. And so I guess my question is about the September quarter. You just had a very good June quarter. Do you expect to go down sequentially and possibly meaningfully? If you can give us any comfort about staying where you were at, that would diminish concerns about some of these issues we are hearing about?

Mark Barrenechea

I’m going to take a part of that. Maybe, Shebly, Jim will take another part. We don’t see customer hesitation today in our pipeline. And I can’t say it any more simply or clearly. When we look across geographies, across verticals, putting the macro concern aside on federal, which I talked about earlier, we are not seeing a hesitation right now. And in fact, customers are actually looking to deploy more technical computing solutions, because it is accelerating and lowering the cost of a product design cycle. So we’re not seeing hesitation, kind of commenting on the phrase, an air pocket that others have seen. Jim, I’ll let you talk about quarterly variance and annual –

Jim Wheat

Yes. I mean, Shebly, we’ve been very consistent for a good reason and what those reasons are that we stay on annual guidance. And if you quarterize, if you will, the revenue range that Mark and I talked about for fiscal ’12, you’d get something like $185 million to $195 million, all things being equal in any given quarter. Now, you know that acceptances, because some of our business is acceptance based and some of our business is large deal based, can swing in any given quarter. So the short answer to your question is yes, it’s possible that you could see a September quarter that has sequentially lower revenues than we saw in June. But for the year, fiscal ’12, we’d expect to average between $185 million to $195 million per quarter, given the acceptances, the big deals and the seasonality effects that Mark and I have talked about in the past.

Shebly Seyrafi – FBN Securities

Right. I wouldn’t mind a small decline after this huge spike of 40% sequentially in the June quarter on a non-GAAP basis. But I’m more concerned whether we go down to like 135, where you were in March. Can you at least say that, you know, if we go down, we expect to stay modestly down in the September quarter? Is that reasonable?

Jim Wheat

I think that’s reasonable, yes.

Shebly Seyrafi – FBN Securities

Okay. That really helps because it looks therefore like you are indeed more immune than some of these other companies we are hearing about. So, can you talk about the product segment? It improved quite well, and it looks like your international growth drove half of your overall revenue growth of roughly $54 million or so. International is roughly half. But can you talk about the big swing factors that drove the upside in your product revenue?

Mark Barrenechea

I would look towards continued UV strength, Shebly, as well as we are competing better and larger InfiniBand cluster offerings. We’re doing well in the cloud. We’re doing well in storage. But I would say the two items that added to a strong Q4 and are up to 24% growth projections is continuing to ramp UV. I talked about our Microsoft relationship on the call and expecting to have UV paired up with Denali as Denali comes generally available. And we’re doing better based on the product cycle in larger InfiniBand cluster opportunities.

Shebly Seyrafi – FBN Securities

That would be all to size. And earlier in the call, you mentioned the next generation stuff is going to include Romley as well as next gen UV and Altix ICE. Right?

Mark Barrenechea

That’s correct.

Shebly Seyrafi – FBN Securities

And are those – those are early 2012 kind of events or when are those expected to occur?

Mark Barrenechea

We’ll see the first products come on line next quarter, fiscal Q2, calendar Q4. And then the remainder of that, calendar Q1, fiscal Q3.

Shebly Seyrafi – FBN Securities

So, all three. Romley, UV and Altix ICE in the next two quarters?

Mark Barrenechea

It’s a – correct, next two quarters. It’s a very choreographed cycle for us. And in fact, the first choreographed cycle of the new SGI of working with Intel and bringing their new architecture to market and us fully exploiting it. If I can just for a moment, if we look at UV, this tick-tock over to Sandy Bridge will take UV and it will double the amount of available memory and it will 4X the amount of cores, all running one instance of an operating system just on this tick-tock cycle over to Sandy Bridge – from weather over to Sandy Bridge.

Shebly Seyrafi – FBN Securities

Last one for me. I mean, why do think you have such strength in those product lines right in front of your next gen cycle? That’s quite unusual.

Mark Barrenechea

We will 2X the memory, 4X the cores. And on Romley, the low end of the market shrinks based on Romley requiring a stronger interconnect. So without an interconnect, you are not going to get that scale on Romley. Our interconnect being UV. Second, we have timed the market very well with FDR and Romley, and it plays to our strength in scale-out InfiniBand and shared memory.

Shebly Seyrafi – FBN Securities

Okay. Thank you.

Mark Barrenechea

Thank you.

Operator

Thank you. The next question is from Tim Quinlisk of Mayo Capital. Your line is open.

Tim Quinlisk – Mayo Capital

Thank you. Did a good job. Mark, if you could just expand a little bit on the introduction of the Romley chip and how that affects your ability to compete in the very high end HPC market where you haven’t really been that big of a player? And can you just size the opportunities in that place?

Mark Barrenechea

Sure. So, good question, Tim. So, Altix ICE, this would be our fifth generation of Altix ICE of over about 10 years. And the design point for Altix ICE was primarily mid market clusters, folks measure that in the 100 to 300 teraflop range. It’s one of the reasons you don’t see SGI typically dominating the top 20 or top 30 of the top 500 list. We’ve made a strategic decision about a year and a half ago in designing the next generation of Altix ICE for Romley that we saw a path to increasing our ability to scale the product to get to the largest of the clusters in the market. We look at that as roughly $1 billion opportunity per year. It’s probably $1 billion of RFPs that come out as that’s sort of cream of the top of the market where IBM and Cray have traditionally been the two competitors.

Tim Quinlisk – Mayo Capital

Okay, great. The next question I have relates to also, again – you've got some competitors out there that have installed base of Itanium servers. And they’re really losing support both from Microsoft and Oracle. How does the Romley introduction fit into that as well as what Denali may be doing, if I’m kind of in the right space there?

Mark Barrenechea

Sure. Actually the two are correlated. My experience in the tech industry now about 25 years is that it’s always at a technology transition point that customers become interested of valuating getting off a two or three-year old generation architecture. So, with Romley and greater Windows Server and SQL Server support, I think we’re going to be able to look at some kind of equivalent scales of Itanium systems and equivalent resiliency between the two platforms. So we’re actually kind of optimistic that we can help accelerated Itanium transitions with Romley and Denali on UV converging over the next two quarters.

Tim Quinlisk – Mayo Capital

Okay. If you’re running a SQL server in Altix UV, right, what kind of functionality or scale can you give relative to some of the other products out there like the Exadata?

Mark Barrenechea

Yes. I’m probably just going to have to segment the question a little bit. So if we look at SQL Server today, Exadata isn’t run SQL Server per se. So the larger scale system you can get on SQL Server today is roughly two terabytes and 256 cores on UV. I can’t announce Microsoft’s plans of where that’s going above that scale. But it’s pretty impressive of where we’re going to take out of the box SQL Server beyond that upper limit. When you compare to UV on Linux, running Oracle, compared to Exadata, we see ourselves having near equivalent performance at about one-third the price. And we’re not advertising yet that we’re going to directly against Exadata. But I’d continue to encourage folks to watch this space and we’ll be walking through our product roadmap in September at our Analyst Day.

Tim Quinlisk – Mayo Capital

Okay, great. And then just one final sort of operating model question. And it relates to some of the comments I’ve seen from you Mark regarding the possibility of hiring about 10% of the sales force this year upcoming plus I’m also noticing on your website that you are adding a second shift out of your Wisconsin facility. Can you speak to the SG&A ramp here and how much of that is kind of being front end loaded for anticipation of what seems to be a fairly long duration up-cycle here?

Mark Barrenechea

I think that goes part to the question of why – maybe to Brian’s question earlier was – could there be a little more leverage in the Q4 model to EPS. Jim mentioned higher commission expense. But there is also bringing on actually a second shift in Chippewa as well as beginning the ramp of our sales force. So it is a little more front-end loaded, as you’ve noted. And it’s all baked into our guidance, of course, for FY ’12.

Tim Quinlisk – Mayo Capital

Okay, great. Thanks a lot. Appreciate it.

Operator

Thank you. Our next question is a follow-up from Brian Freed of Wunderlich Securities. Your line is open.

Brian Freed – Wunderlich Securities

Hey, guys. I have three more questions. First, update on SGI Japan, can you talk about how that’s gone in your first full quarter of it, if you’ve been happy with the integration, production? Is everything firing well?

Mark Barrenechea

Exceeded expectations. We’ve gone in and right-sized the expense structure. We integrated the teams into our selling, service and supply chain processes. And I would just say it exceeded expectations. Jim, we had roughly how much of revenue in Q4 from Japan?

Jim Wheat

We had about $46 million.

Mark Barrenechea

Yes. So, good contribution from Japan in Q4.

Brian Freed – Wunderlich Securities

Great. My second question, on the slide deck, in the last few quarters you’ve had kind of your longer term business model. I didn’t see that in the slide deck. Do you guys still think over the long-term that a 8% to 12% operating margin is a reasonable market?

Jim Wheat

Yes. Hey, Brian, this is Jim. I’ve been pretty consistent over the three-plus years I’ve been here that we see and we drive to a long-term model that would get us to an operating margin in that range. Now, I’d also tell you if you are with us on the Analyst Day, we do expect to talk with a little bit more granularity about the long-term model for the next year or two after fiscal ’12.

Brian Freed – Wunderlich Securities

Great. And then my third question is a little more on the technical side. There’s been a lot of questions around solutions like Exadata or In-Memory Database. Can you take just a minute and explain how Altix UV differs from either an In-Memory Database on, say, fusion I/O card on the PCIBA or an Exadata type architecture?

Mark Barrenechea

Sure. And Brian, I’m going to start just by defining the market a bit and the only answer your specific question. We look at big data along three vectors. The first is unstructured data, a.k.a. Hadoop Solutions. Second, structured data, in-memory or on fast disk using UV. And three, storing and accessing big pieces of long-term data with our persistent technology, a.k.a. ArcFiniti. So we look at big data in kind of these two pieces. The first piece being lots of data on structure distributed to dupe, lots of data centralized and organized UV. I’ve got to get to all these data, structure or unstructured over time cost-effectively, ArcFiniti.

With that, it’s really – the difference between a UV and a fusion I/O is the difference between sort of high IOPS – the way I describe it is high IOPS versus lots of residence in in-memory. So pure in-memory with an interconnect is simply going to perform significantly faster than having to go out over a PCIe or other low-speed low-latency bandwidth. So if you are looking for lots of little apps and lots of little burst speed, a fusion I/O is probably a reasonable solution to go look at. If you’re looking to truly scale a business analytic application, you wanted all to fit in memory without having to go through a little straw, a.k.a. PCIe, to go and have data cell one talk to data cell two.

Brian Freed – Wunderlich Securities

Okay. And then also versus like an Exadata?

Mark Barrenechea

Comparing to Exadata, Oracle’s approach is basically taking InfiniBand servers and deploying Oracle RAC, Rapid Application Clusters, on top of their standard database and BI tools and then vertically testing and certifying that. UV is very simply against shared memory, but with a standard Linux distribution, standard Oracle database, and standard BI tool on top of that. And our data is showing there are nearly equivalent performance, but we’re about one-third the price.

Brian Freed – Wunderlich Securities

Okay. Great. Thanks so much.

Operator

Thank you. The next question is from Alex Kurtz of Sterne Agee. Your line is open.

Alex Kurtz – Sterne Agee

Hi there. A follow-up here. Just as a follow-on on Brian’s right here, you hired Franz out of SAP I believe. And I’m sure he came here because he thought the Altix UV product could in fact take on Exadata. So can you just talk about the commercialization of UV out of the R&D, university, federal space and into the commercial space? And can you talk about any additional commercial-type wins in the quarter and what you’ll be sort of focused on in the next year?

Mark Barrenechea

I’d say there’s two things on the horizon, Alex, that is going to position us with a right-line competitive advantage. One is our working relationship and synchronized product release with Microsoft, a.k.a. Denali. We will get that as a catalyst. Second is Romley. And today UV was – generation one, UV one was built around the highest speed Intel processors. And that’s the highest cost. With the support of Sandy Bridge, we are going to support the entire Sandy Bridge skill range for UV. So we’re going to have very economical price points for UV plus the scale. So we think those two things combined, both the increased scale of UV and more economic price points plus the deep technology relationship with SQL Server is going to put us squarely differentiated in the commercial market to begin to get more scale for UV outside of its traditional core market.

Alex Kurtz – Sterne Agee

And have you made sure that you can, I mean, direct those enterprise market as traditionally that hasn’t been sort of the core focus? So, how do you execute – obviously the product potentially has the opportunity to really do well in the space, but how do you execute from a go-to-market in the enterprise space?

Mark Barrenechea

Well, we’re hoping to have a big partner to go to market with.

Alex Kurtz – Sterne Agee

Great. Okay. And then last question for you, your competitor Supermicro had a tough gross margin quarter, Mark. And there’s a lot of different components that went into it. Did the Rackable business have a bad gross margin this quarter just because of sort of maybe component issues or pricing in large datacenter deals, which I think they talked about on their call?

Mark Barrenechea

No, I’m not – nothing has been highlighted. I haven’t seen any sort of anomalous move in Rackable sort of margins this quarter. So we haven’t seen anything anomalous, Alex.

Alex Kurtz – Sterne Agee

Okay. Thank you, guys.

Mark Barrenechea

Thank you.

Jim Wheat

Thank you.

Operator

Thank you. Our next question is from Mike Shinnick of Wasatch. Your line is open.

Mike Shinnick – Wasatch

Thank you. Good afternoon, guys. Congratulations.

Mark Barrenechea

Thanks, Mike.

Mike Shinnick – Wasatch

My comment is on the business model. And I guess it’s a comment/question, really the page five, Jim, and it’s picking up kind of what some of the other questioners have been – in the past, you’ve talked about what the growth in the top line, operating margin – I'm sorry, gross margin improvement for continued leverage to the business model and the non-GAAP EPS guidance is quite a wide there, 5% to 40% growth. Could you just give us a better sense of – are we looking at more of an investment in the business here or continued leverage on the operating margin side as we look at fiscal year ’12?

Jim Wheat

Yes, Mike. I’ll start out and then Mark will probably chip in. We definitely look at our fiscal ’12 as more of an investment year. And as we’ve talked about, as Mark had talked about, we see investing in a little bit front-end loaded, as we said earlier, in our sales force and investing in product generations, new product generation activity.

Mark Barrenechea

Mike, let me jump in on this as well. When we looked at our FY ’12 and we’ll get out-years more clear when we get to our Analyst Day in September, the basic theme, I’d say, in our FY ’12 guidance is a balanced year; balancing growth, balancing EPS improvement while investing in the business. So we’re looking for up to 24% growth on the revenue line, up to 40 points of EPS expansion, non-GAAP EPS, while growing the sales force 10% and investing in the Romley cycle. So if we cut back on investments, sure, we can increase EPS. But we want to be able to continue growth on the revenue line while balancing good EPS growth as well. So one of the reasons there isn’t greater flow-through is investment in sales force and product. So those are the balances we have in our FY ’12 plan.

Mike Shinnick – Wasatch

And that’s why that range there is so wide, the 5% to 40%?

Mark Barrenechea

Correct.

Mike Shinnick – Wasatch

But in terms of thinking about planning and trying to achieve what I heard in the earlier response, and just to confirm I’m hearing it now, is that it’s not necessarily going to look like that across the full year, maybe this upcoming quarter, in the next quarter, a little more operating margin pressure and then bearing some of that fruit towards the back half of fiscal year ’12?

Jim Wheat

First, I would also mention that that range of 5% to 40% in non-GAAP EPS, Mike, also reflects –

Mark Barrenechea

Expansion.

Jim Wheat

In our view, expansion and mix an execution, as we’ve said consistently. Now, as Mark and I have said in the past, we always have the opportunity and the ability if we needed to pull back if that were necessary. But this is what we expect to do this year, and again, that relatively large range, which I would point out, even at the low end, is an expansion over where we finished, represents all of the investments we expect to make in the business coupled with our view of mix and things of that nature.

Mike Shinnick – Wasatch

Okay. And then one more question on, you know, when we talk, I spoke of probably a little more there is – maybe about 12 months ago, there was some talk from you guys about the increase in services as a portion of the overall mix. And I think, Mark, at one point, you talked about eventually driving that towards 50%. And I know it’s a wonderful situation to have. You’ve got your product revenue really growing so fast that services have actually declined as a portion of the mix. How do you see that pacing? At what point did services really start picking up a greater share than mix?

Mark Barrenechea

I would – I'd say a couple things. One, we should see services pick up here in FY ’12, given that’s an increased contribution from Japan, given Japan is more of a 50/50 business of product and services. Second is, as we deliver more complete solutions like ArcFiniti, like OpenCFD, there’s more of a value-add services attached to that of professional services. So, out here in fiscal ’12, we’re actually expecting to see a stronger percent weight on services. I think our model is showing, Jim, if I got it right, we ended fiscal ’11 around 73% product, 27% service.

Jim Wheat

Correct.

Mark Barrenechea

We’d look to see services closer to a third in FY ’12.

Mike Shinnick – Wasatch

Okay. That’s helpful. That’s very helpful. And again, well done. Thank you for all your hard work.

Mark Barrenechea

Thank you, Mike. Appreciate your support.

Operator

Thank you. This is the Q&A portion of today’s conference. I’d like to turn the conference over to Jason Golz for any closing remarks.

Jason Golz

Thanks, Tyron. We’d just like to say thank you for your participation today and we look forward to seeing you in New York at our Analyst Day on September 22. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a wonderful day.

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