Cray's (CRAY) CEO Peter Ungaro on Q4 2015 Results - Earnings Call Transcript

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Cray Inc. (NASDAQ:CRAY)

Q4 2015 Results Earnings Conference Call

February 11, 2016, 4:30 am ET

Executives

Paul Hiemstra - Investor Relations, Corporate Treasurer

Peter Ungaro - President, Chief Executive Officer, Director

Brian Henry - Chief Financial Officer and Executive Vice President

Analysts

Alex Kurtz - Sterne CRT

Rich Kugele - Needham

Chad Bennett - Craig Hallum

Aaron Rakers - Stifel

Operator

Good afternoon. My name is Blair. I will be your conference operator today. At this time, I would like to welcome everyone to the Cray Inc. 2015 full year and fourth quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions].

Thank you. Paul Hiemstra, Corporate Treasurer and IR Contact, you may begin your conference.

Paul Hiemstra

Good afternoon. I would 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 call by dialing 1-855-859-2056. International callers can dial 1-404-537-3406. You must then enter the access code 41522987. 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, sales and delivery 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 earnings press release dated today and annual report on Form 10-K for the period ended 12/31/2015, as well as 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 to 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 will start with some comments on our fourth quarter and full year performance, then turn it over to Brian who will go through our financial results and outlook. I will wrap up by discussing our flans for 2016 and then open the call for Q&A.

As we announced in January, we had a great fourth quarter and full year. We posted record revenue for the fourth year in a row exceeding the revenue guidance we laid out on our last earnings call and delivered strong profitability. It's really an incredible year and taking a step back we have now grown revenue more than 200% over the last four years. Obviously, something we are very proud of. I would like to thank all of our employees around the world who have been extremely dedicated to helping our customers be successful while also achieving our corporate goals.

Now let we take you through how we did against the two major focus areas we laid out for the year. The first was to drive strong growth in our targeted markets of supercomputing and big data storage and analytics. We finished strong against this goal with a total revenue growth of 29% for the year driven by numerous supercomputing and storage acceptances around the world. Several of these acceptances were among the largest, most complex systems we ever delivered and I am a proud of our team effort here to put these high-performance solutions in the hands of our customers around the globe.

Among the projects we completed in the quarter was the first phase the massive new Trinity system at Los Alamos National Laboratory. This XC40 and Sonexion storage will now serve as a National Nuclear Search Security Administration's flagship supercomputer, supporting all three of NNSA's national laboratories. Trinity is more than 300,000 cores. Our new DataWarp technology and 82 petabytes of storage delivering 1.7 terabytes per second of bandwidth. Without a doubt, this is one of the most advanced systems on the planet. With a major upgrade planned for later this year, this beast of a system is going to get significantly more powerful in the not-too-distant future.

Growth from commercial customers was especially strong in 2015 doubling as a percentage of our total revenue to more than 15%. The commercial market roughly doubles our addressable market, allowing us plenty of room to continue to grow in the future. Given our focus here, I want to highlight some of the progress we made in 2015. For the year, two of our top 10 and four of our top 15 customers were commercial companies. We had a strong here in the energy segment delivering a multi-petaflop system to Petroleum Geo-Services for use in its advanced seismic imaging program.

We had a key win with another energy customer that is using our GPU-based CS-Storm product. We delivered more than 10 systems to a large aeronautics company and more than five systems to a large automobile parts manufacturing company. An existing large financial services customers put two additional Cray supercomputers into production, leveraging the unique scale and performance of our systems in their highly competitive marketplace. And three of the top 10 Fortune 500 companies are now Cray customers and two of these have already purchased multiple Cray systems, representing important repeat business once we get them established.

Across our entire business, our momentum of new awards also continued as we secured several new wins recently. Just this past month, the European Centre for Medium-Range Weather Forecasts, also known as ECMWF, announced that they choose a major upgrade and expansion to their XC supercomputer and Sonexion storage. This is another example of the upgradability of our systems, providing continuity for our users and simultaneously driving down TCO.

We secured another win at the University of Warsaw in Poland, which is one of the premier centers for large-scale HPC simulations and analytics for all of Central and Eastern Europe. They selected a six cabinet XC40 to power their leading research data center for computational and data driven sciences.

And in November, we were selected by the Alfred Wegener Institute in Germany to deliver a CS400 cluster supercomputer. This system will feature the Intel Omni-Path System Interconnect, our first customer for this new technology.

Our second major focus area was to continue to establish a stronger presence in the big data storage and analytics market. Our high-performance storage solutions include our Sonexion 2000 Lustre parallel file system and our Tiered Adaptive Storage data management solution. We had a good year in storage overall as it grew nicely over last year and increased as a percentage of our total revenue as well. In the fourth quarter alone, we completed numerous large Sonexion installations, including at Los Alamos National Laboratory, Korea Meteorological Administration, the DoD's Engineer Research and Development Center and NOAA's National Center for Environmental Prediction.

In big data analytics, we have two unique offerings, the Urika-GD and XA platforms. These systems are among the most scalable highest performing analytics systems on the market. A U.S. government customer recently selected a Urika-GD to continue their work in leveraging graph discovery for their important mission. On a broader basis, our customers continue to push the integration of high-performance analytics with the modeling and simulation they do with their supercomputers. This convergence of supercomputing and big data is a powerful trend that has the potential to dramatically expand the use of supercomputers throughout many different industries and we are in a great position to play an integral role as this evolves. The recent win at the University of Warsaw is a great example of this convergence.

Finally, before I turn it over to Brian, I want to mention that, sadly, one of our Board members recently passed away. Steve Richardson served on the Cray Board since 2004 and had a profoundly positive impact on me and our entire company. Steve was a steadying influence throughout his time here and I will always remember him for the leadership qualities he possessed as well as his continual reminder for us to keep our focus on the long-term. We are proud to have worked with him and our condolences go out to his family.

Now here is Brian.

Brian Henry

Thanks Pete and good afternoon everyone. I too want to express my admiration for Steve as a man and as a Board member and how much each of us appreciate the time he served here at Cray. I will start with our fourth quarter results, but most of my comments will be on the full-year, which is really the best way to look at our company. Then I will take you through the 2016 outlook.

For the fourth quarter, revenue was substantial at $267 million and they came in at the higher end of the range we had previously provided. Product revenue for the fourth quarter was strong at $233 million and service revenue was $35 million. Both GAAP and non-GAAP gross margin for the quarter were 32%. As a reminder, we focus on non-GAAP measurements which we believe is a better way to look at our company and progress. As we suggest and we suggest that investors focus on results over several quarters as the variability in any given quarter is typically very large given the nature of our business.

Non-GAAP quarterly operating expenses for the fourth quarter were $53 million compared to $47 million in the prior quarter, with the increase primarily due to higher incentive compensation and growth in employee base. Net income for the quarter was $20.3 million or $0.50 per share. Non-GAAP net income for the quarter was $32 million or $0.79 per share.

Our fourth quarter operating results include $3.6 million for depreciation, noncash pretax items excluded for non-GAAP purposes or $0.5 million for amortization of intangibles, $0.1 million for purchase accounting adjustments and $2.8 million for stock compensation expense. Our non-GAAP results also adjust for our estimated cash taxes that consider our net operating loss carryforwards and adjust for any changes in our valuation held against those deferred tax assets.

Now shifting to our full-year results, revenue for 2015 was $725 million, an increase of 29% for the year and for those of you who follow us closely for the last few years, even when you adjust for the $40 million that slipped from 2014 into 2015, we still delivered solid growth of 14%. Product revenue grew substantially in 2015 to $601 million, driven primarily by the growth in supercomputing and storage. Service revenue for the year was $123 million, a 22% increase over 2014, driven by continued growth in the maintenance revenue due to the higher number of systems in the field as well as continued strong performance in our engineering services business. GAAP net income for 2015 was $27.5 million or $0.68 a share.

Non-GAAP net income for the year was $53 million or $1.30 per share. That compares to $24 million or $0.60 per share in 2014. Total non-GAAP gross margin for 2015 was 32%, a two point reduction compared to 2014. Non-GAAP product margin came in at 29% compared to 31% in 2014. Both of these were negatively impacted by a few selected customer contracts which ended up with higher cost than anticipated at the time of the bid.

Non-GAAP service margin for the year was 42% compared to 46% in 2014. It was negatively impacted by increased staffing costs and higher incentive compensation. Service margin was also impacted by engineering services, which typically carry lower margins and represented a higher mix of our 2015 service revenue.

Non-GAAP operating expenses for 2015 totaled $173 million compared to $164 million in 2014. This increase was primarily due to factors associated with our ongoing growth efforts including higher personnel related expenses and higher incentive-based compensation. The increase was also partially offset by an increase in R&D cost associated with engineering service revenue classified in cost of sales.

I am pleased with the substantial progress we have made to improve our profitability. Driven by our strong revenue growth, non-GAAP operating margin increased substantially in 2015 to 7.6%, compared to 4.5% for 2014. GAAP operating margin increased to 5.7% from 1.6% in 2014.

Now shifting to the balance sheet. Total cash and investments increased substantially to finish the year at $285 million, compared to $146 million at the end of 2014. Inventory at year-end was $114 million, compared to $144 million at the end of the prior year. Of our total inventory, about $50 million or 44% was out at customer sites and in the acceptance process.

Net working capital at December 31 was $415 million, an increase of $54 million for the year. Working capital tends to be less volatile than cash balances and we believe is a better measure to track than simply cash and investments on their own.

Now I would like to take a moment to discuss our 2016 outlook. For 2016, we currently expect revenues to be in the $825 million range. We currently expect the fourth quarter to represent more than 50% of our total revenue for the year, driven primarily by anticipated component availability. Revenue for the first quarter is expected to be in the range of 100 million.

Non-GAAP gross margin for 2016 is expected to be one to two percentage points higher than for 2015. Non-GAAP operating expenses are expected to be about $205 million. Adjusting for items for GAAP are predominantly driven by stock compensation and they are expected to be about $14 million for 2016, with about $1 million of that going to cost of sales.

Share count on a fully diluted basis when profitable, should be about $41 million to $42 million for 2016, though it is dependent on a number of factors including our share price. Our effective Non-GAAP tax rate for this year is anticipated to be about 10%. Based on this outlook, we expect to improve our GAAP and non-GAAP operating profit in 2016 when compared to 2015.

As we look at our expected growth over the next several years and the manufacturing capacity that it will require, we are currently evaluating our options to build an additional facility in Chippewa Falls. As currently contemplated, this investment would increase our manufacturing capacity by more than 75% and it is expected to be operational in early 2017 and is estimated to cost about $25 million. We will also evaluate third-party finance options along the way. Well, one more thing I wanted to point out that our design options for this facility will allow for modular capacity increases over time.

In conclusion, I am pleased with our results for 2015. In 2016, our focus will again, be on driving strong growth and improving our operating leverage.

With that, I will turn it back over to Pete.

Peter Ungaro

Thanks Brian. Turning to 2016, we have three main focus areas. The first is continue to drive strong growth and deliver on our revenue target of $825 million for the year. For 2016, our targeted growth rate is about 14%. However, when you adjust for the revenue that shifted from 2014 into 2015, which was about $40 million, as Brian mentioned, our 2016 target growth rate is actually more than 20% for the year. That's the way I think about the growth we are driving.

This confidence is a result of several factors including our momentum in the market, our highly differentiated products as well as a strong competitive position. We have major refreshes planned in each of our three focus areas of supercomputing, storage and analytics and on a longer-term basis, our goal remains to drive two times the market growth rate in each of these three markets, which on an aggregate basis, we have been able to do over the last few years.

As is typical at this time of year, we have a lot of work left to do to secure the contracts necessary to achieve our outlook. However, our pipeline remains strong and continues to consistently grow as we expand our products, market focus and geographic reach. Our momentum of new awards has continued and we signed a number of new contracts recently, including in each of our major geographies around the world.

On the development front, our roadmap for 2016 includes several exciting new upgrades to our existing products. We have three major supercomputing product releases currently planned for the year. Two based on new processors expected from Intel, the next-generation of the Xeon processor and follow-on to the Xeon Phi known as Knights Landing and a third, which will integrate the new Nvidia GPU, code name Pascal. A significant portion of our revenue this year will rely on these new processors as well as a number of other technologies. Much of it is expected to be recognized in the fourth quarter and the availability of these new processors are a key driver to our backend weighting for the year.

We have a number of development programs going on across the company in order to deliver the products we need for the year, including to integrate these new processors into our products. Of course we are working closely with our partners on each of these solutions. As is not atypical for this phase of the development process, a number of technical hurdles still remain and delivery timing of some of these third-party components will not be known until later this year. We certainly are not out of the woods yet on any of them. That said, we are currently in position to deliver these systems later this year.

In big data storage and analytics, we have updates planned in both of these areas this year. We aren't ready to announce details on these plans yet. So as I like to say, watch this space.

Our second major focus area is to continue to grow our revenue from commercial customers. Commercial business represented more than 15% of our total revenue for 2015 and our goal is to continue to increase that percentage over time. Commercial customers roughly doubled the addressable market for our solution and we are seeing growth opportunities in many verticals with initial target markets being energy, financial services, manufacturing and life sciences. On a longer-term basis, our goal remains to drive a third of our business from the commercial market.

Our third main focus area is to continue to improve our operating leverage, something we made excellent progress on in 2016. This is all about continuing to scale and grow and do so profitably. So there are several variables we watch closely. The first is to continue to grow revenues like we targeted for 2016. The second is to improve gross margins over time and our goal here is to grow them by one to two percentage points this year. And then third is to manage our operating expenses as we grow so we build a nice leverageable business model.

That doesn't mean that we aren't investing in growth areas for the future, because clearly, we are. We continue to evaluate each project on an ongoing basis to ensure that we are deploying our resources in the most prudent manner possible inn a way that we believe will provide the best return for our shareholders. Right now these investments are primarily around developing differentiated technologies and expanding our sales reach.

Let me wrap up by saying that I am very pleased with what we accomplished last year. We executed extremely well and delivered a strong year in the process. While we have plenty of work left to do for the year, we are off to a solid start and we are in good shape to deliver continued strong growth and expanded operating profits.

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

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from the line of Alex Kurtz from Sterne CRT. Your line is open.

Alex Kurtz

Hi Peter. Hi Brian. So just on these large installations that mainly take place in the second half, I think you guys had made a comment about greater than 50% of the year is going to be in Q4. Is that still about right?

Peter Ungaro

Yes. That's correct, Alex.

Alex Kurtz

And besides --

Peter Ungaro

Alex, really driven from those three processors that I talked about and availability of those components.

Alex Kurtz

Right. So your timing are not the main dates on those big projects?

Peter Ungaro

Well, once we build the machines and deliver them to our customers, according their go through and acceptance process and then we get revenue at the end of that process. So we will always have that at the end after we do deliveries. But right now, I would say, our main focus is getting those third-party components and getting them into systems and getting them out the door. And I think, our view is there is still a lot of work left to do to get that done, both by us, but even more importantly by the processor vendors themselves in getting those to us. And then we will do our thing. So we feel that the biggest focus area right now is for us to get all the existing contracts that we need to get to our revenue for the year and then get those components in so we can get them out to customers and get them through the acceptance process.

Alex Kurtz

And Peter, just last question here. Every year we ask you this question about visibility on the full-year number based on historical levels. Like how do you characterize the $825 million number based on backlog going into this year and assuming that the component translates when you need them today?

Peter Ungaro

It's very early in the year, as you know and we still have clearly a lot of work left to do. And the good thing is, our pipeline is growing. We signed a number of new contracts. So we look, Alex, to get directly to a question of where we were this time last year versus where we are right now. It's about the same, from a percentage of our overall revenues that we have booked right now. But the bigger thing is that every year, our number keeps on growing, our expectations keep on going up. So there is plenty of work ahead of us this year to still do. So we are very focused on closing most of those contracts that we need.

Alex Kurtz

All right. Thank you.

Peter Ungaro

Yes. Thanks for the call.

Operator

The next question comes from the line of Rich Kugele from Needham. Your line is open.

Rich Kugele

Good afternoon guys. Well done. Let me just focus a little bit on the commercial side. The market is obviously concerned about IT spending and at the same time there is probably some misunderstanding on the part of the investor base on the value you are adding on the commercial side. So can you just talk a little about the workloads that you are seeing being deployed onto your systems in the commercial land and the opportunities in 2016 there? And then I have a follow up on the margin improvement for 2016. What do you think are the drivers for that? Thanks.

Peter Ungaro

All right, Rich. I will take the first one and let Brian take the second one. We are really excited about commercial. It's a huge opportunity for us and almost untapped even though we have had nice growth over the past few years in growing both our commercial customer base as well as our revenues in the commercial segment. Our biggest driver in the commercial markets has really been this huge growth of data.

And as those data sets for commercial customers get larger and larger, with they are finding is that their traditional architecture that they are doing there computing on are really not keeping up with the growth of data. And we have really seen a huge push from them as they start to look at all their data, as the think about new ways to the process through that data, new algorithms, new methods that they can process through that data, that we are really starting to pick up new workloads or advanced kind of workload.

So for instance, in the energy segment, which is one area that we have been particularly strong in, a huge part of that is, with all the data now that they need a faster way to get through that. They need to do it much more in parallel verses in serial processing as they have done in the past. And of course, our systems are really architected to make that go really well.

Very similarly in financial services, they have a huge need for speed and there is a big amount of data that they are dealing with, that they really haven't dealt with before and they are starting to turn to not only our systems, but in new technologies like GPUs and other accelerators to try and attack those problems overall.

So we are seeing this quite a bit across the board. The other thing that we are seeing a lot in commercial is, we are sitting us get started with new commercial customers, sometimes at a much smaller systems side than we traditionally have been used to. And once we prove ourselves with that system, we are seeing them repeat and reup and buy multiple systems.

I mentioned that we had one customer that last year bought 10 different systems from us. And then another one that bought five around the world from us in different locations. And so we are starting to see a little bit more repeat business from commercial customers that we really don't see from our traditional customer base where they buy one big system every two, three or four years depending on their budget cycle.

So it's a quite a different field for us in that marketplace and we have done a lot of work internally to really help to get ready for that and continue to grow in that area.

Rich Kugele

Would you expect the 15% increase in 2016 or is the other side still have such a backlog that it will be passed?

Peter Ungaro

Yes, it's a great question. We definitely want to grow that number. I have mentioned a number of times that I would like that percentage to be a third of our business over the next few years. But it's going to be lumpy year-to-year in such. Definitely we have internal goals to do better than 15%, without a doubt in 2016.

I guess the one thing I would say right now for us, that's a little bit of an unknown in the commercial revenue for 2016 is what happens in the energy market. That's our biggest commercial market right now. They are having a rough patch. We haven't seen them back away right now.

We are seeing, in fact, the larger energy companies really investing in this area because they think that they can you use any strategic advantage during this time. But that's one that we just really monitor a lot. And I think without a doubt, we are going to grow our customer base year-over-year. And we will just have to see how the revenue plays out. But we definitely have internal goals to keep on growing that number, Rich.

Brian Henry

Rich, getting on that gross margin thing, a couple of things to know. Remember that in the first half of the year of 2015, our gross margins were depressed in an unusual way. We had some unusual bids where the cost came in a lot higher. We also suffered from being on the early side of some of the new product cycles, such as memory and paid a premium price for those early shipments and things.

So they hurt us early. As the year went on, we rebuilt and we feel where we are headed for 2016 is a good opportunity for us to improve margins and I said one or two points. And we are also going to get some help on the service side this next year too in terms of what improvement we expect in gross margins overall.

Rich Kugele

Excellent. Okay. Thank you very much.

Peter Ungaro

Yes. Thanks, Rich.

Operator

The next question comes from the line of Chad Bennett from Craig Hallum. Your line is open.

Chad Bennett

Hi. Good afternoon guys. Thanks for taking my questions.

Peter Ungaro

Okay. Thanks, Chad.

Chad Bennett

So just following up on Brian's comments on gross margin there, it's great that you guys are guiding for improvement this year. Can you speak to the competitive environment, especially on midrange to large supercomputing deals, if anything's changed there? And if at all, you have changed your thinking on gross margin looking at 2016 versus when you initially gave the guidance back in the third quarter? Has become more competitive? Or has anything changed there?

Peter Ungaro

Yes. Great question, Chad. So you just overall, when we look at the competitive environment, over the last quarter or so, we haven't really seen many changes. So the way we see the market today is very similar to the way that we saw it when we first came out with the guidance. So that really, I would say, just helps, we feel, as I mentioned, very confident and comfortable with our competitive position within that market and our opportunities within that space. So I think from that perspective, all good.

Of course, as you know, in our business sometimes the very large deals, you can get a certain competitor to come out with very aggressive pricing. Typically, we don't go down to play that game. So typically we are really focused on keeping our margins at a good level. And as Brian mentioned, the softness in our margins last year was due to some other factors not really competitive factors, but some of our component costs and different things like that.

So from that perspective, I would say that that's not a major driver. Of course, we are in a competitive market and we always watch that. But I don't think that that's been a major piece of it. And it definitely hasn't changed our view from when we first came out with this guidance a few months ago.

Chad Bennett

Okay. Thanks. And then can you give us an update on the IBM-Lenovo share gains opportunity that you guys have in front of you? And where do you think we are then in any type of guesstimate on how much you have monetized at this point? And in specific to Blue Waters and that annual spend opportunity, is there an upgrade cycle around there that you can see out there that's more prominent this year, next year? Is there any kind of opportunity there that might be not as linear as we might think from the outside looking in?

Peter Ungaro

Chad, just to be clear, you mentioned Blue Waters, but did you mean Blue Gene??

Chad Bennett

Sorry, Blue Gene, yes.

Peter Ungaro

So this has all been really positive for us. We won a number of accounts that went over to Lenovo. And in a few instances, as you know, even IBM has used Cray for some of their opportunities where Lenovo didn't work out for the customers. So it's been a really good opportunity for us and something that we have been able to capitalize quite a bit. We have also won a few of the Blue Gene accounts.

In the past, we talked about KAUST and Argonne and just on this call we mentioned the University of Warsaw in Poland, all Blue Gene accounts. And there is more of those to come over the next few years. And so we definitely have opportunities in 2016 at various Blue Gene accounts. So we feel like we are in a really good position here and that we already have taken advantage of some of that and now opportunities are going to continue over the next couple of years.

Chad Bennett

Have you changed your view on the sizing of the market share opportunity to you?

Peter Ungaro

No, not at all. I think that we still view it as a pretty good sized market and a good opportunity for us, incremental to our business overall.

Chad Bennett

Okay. Great.

Peter Ungaro

I think the one thing, Chad, just on that, I think what we have seen here, if I characterize it here, I don't see a change in the ultimate opportunity. What I see is that it is spreading out a little bit further. So we were thinking that it was going to be mostly in 2016, 2017 kind of timeframe, a little bit in 2015, a little bit in 2017, mostly in 2016. I think we now see it spreading kind of in the 2015 as we saw little bit of wins last year there. 2016, 2017 and even into 2018 a little bit. So we see that spreading out. One thing that we are seeing a lot with the big centers is them spreading out their purchases a little bit, but buying much bigger system in each incremental drop. I think, a good example is the Los Alamos Trinity system. It's a little bit longer than normal maybe extra year on that, but then a much bigger system then we seemed a customer like that purchase. So we are starting to see that trend, which for us overall, is a fine trend. So we don't mind that at all.

Chad Bennett

Right. And then last one for me. So Pete, you talked about the initial Omni-Path win or you mentioned it in the script. Can you talk about as much as you can the Omni-Path positioning relative to your interconnect over the next couple of years and how you think that plays out? And then I will jump off. Thanks.

Peter Ungaro

Yes. No problems, Chad. So Omni-Path is an exciting new technology. We really view it with our cluster line. So in our CS400 line of products, where we now support both the InfiniBand products from Mellanox, of course, as well as the Intel Omni-Path. We are not sure how that's all going to play out this year, how many customers are going to go stay with InfiniBand, how many are going to move to Omni-Path. I think that that's really going to play out over the next few months as people start getting real data about how both these technologies play against each other.

When we look at Omni-Path compared to our Aries technology, which is on our XC40 line, we clearly see advantages with our Aries technology, especially at scale and when you have a lot of performance needs and a lot of data that's moving around the machine altogether. So we still feel very strong in our competitive position with the Aries. A future Omni-Path product will eventually replace Aries, but we don't see this first generation of Omni-Path being that product. We see that really playing in our cluster side of our business.

Chad Bennett

Great. Thank you.

Peter Ungaro

Yes. Thanks Chad.

Operator

[Operator Instructions]. The next question comes from the line of Aaron Rakers from Stifel. Your line is open.

Aaron Rakers

Hi guys. Congrats on the quarter and year.

Peter Ungaro

Thanks.

Aaron Rakers

I wanted to follow up on Chad's question a little bit. With regard to the Blue Gene opportunities and let's just say the systems that are listed in the TOP500 list, there is only a few that have been announced project wins or are rather future replacements of the Blue Gene. When you look at the 2016 guide that you have laid out, I am just curious, are you only factoring in those systems that have been announced projects in that $825 million guide and therefore anything that's incrementally announced would be additive to the outlook going forward?

Peter Ungaro

No, Aaron. So the way that we think about the $825 member is, we know that there is a few of those Blue Gene customers that haven't publicly announced projects to upgrade them, but are working through procurement cycle that we expect to kind of complete sometime this year and do upgrade. So I think that we see that opportunity really well. You can imagine we are talking to all those customers in the marketplace around the world. So we see that that as part of the way that we think about our $825 million.

Of course, this aligns, we mentioned on the call, there is a lot of work to do to get there. So there is some upside opportunities, there some downside risk, just as normal this early in the year. But what I was trying to get across to Chad's question is just that we have seen that kind of spread out. So we see customers holding onto their big supercomputers, Blue Gene being one of them, for a little bit longer period of time than they have traditionally, which typically most of the big government customers run three or four year upgrade cycles.

We are seeing that stretch a little bit, maybe six months to a year or so. And so that's what I am saying about that opportunity spreading out. But when we see and giving guidance for our 2016 numbers, we pretty much know what's happening out there with all those customers. We think about that and our opportunities and our win rate as we come up with our guidance for $825 million.

Aaron Rakers

Okay. Fair enough. And then two other quick follow-ups here. Just a quick update on Urika progression. Where you stand on that? And how that investment relative to the flow through effect to the bottom line earnings shaping up? What it was in 2015? And then what you expect it to be in 2016?

Peter Ungaro

Yes. So I really think that this, I mentioned a little bit about this convergence between supercomputing and analytics and I think that's going to be huge opportunity for the company overall. And it's something that work we are very focused on and well positioned. I think that the Urika products are doing really well. And I gave a little hint towards, we got a nice little upgrade coming in that line later this year that we are very excited about.

You were asking really about how that flows down to our bottom-line. And what I would tell you is, in 2015, as you mentioned before, it was really a double-digit kind of millions of investment, right. So as we look at the revenue and the margin from those wins and we look at the cost that we are spending, it was in the low double-digit millions and that's where it was for 2015. So in line with what we had told you guys earlier.

In 2016, we expect to continue to grow on the revenue side and get that number, still being a negative on the bottom line. It's still an investment area for us. But more in the single-digit millions in 2016.

Aaron Rakers

Perfect. And then final question for me would be, I am just curious on your announcement of the Chippewa Falls investment. You said a 75% potential future increase of capacity. I remember a couple of years ago you had done something obviously, I think, even more meaningful in terms of manufacturing footprint. Can you help us understand with that capacity expansion, how do you guys think about how much business you can support? Just remind us again how you think about capacity expansion relative to the topline you expect to be able to support?

Brian Henry

Well, there is a lot of variables that go in to it. But we start with what we think we can do in revenue. We think about various scenarios and then we think about what are the key constraints in order to deliver those kinds of revenues compared to where we are and then build a plan around it that will last us for a while. In this case, we do all that analysis thinking about the key constraints often having to do with power and cooling and then we designed a strategy around that. In this case, a modular strategy where we can augment at lower cost increased capacity in a facility, but start out with enough that will give us the flexibility in case we over achiever our numbers or have a different mix. When we think about capacity, we also think about peak periods, not just the average. If that's helpful.

Peter Ungaro

Aaron, as we mentioned earlier, over the last four years we have grown 200%. So even though we did that upgrade to our manufacturing capacity a couple of years ago, we are starting to grow and as we project out into the future over the next three to five years, that's where we really see that as we look at our opportunity to continue to grow that we need to stay ahead of that a little bit and that's where we are looking at. And as Brian mentioned, the design that the guys have come up with allows them to modularly grow that much easier than we have in the past with our existing facilities. So we are pretty excited about that.

Brian Henry

And remember, this wouldn't come online until 2017 as contemplated.

Peter Ungaro

Correct.

Aaron Rakers

Thank you guys.

Peter Ungaro

All right. Thanks.

Operator

And there is a question from the line of Alex Kurtz from Sterne CRT. Your line is open.

Alex Kurtz

Yes. Guys, just a couple of follow-ups here. Just to tack on to Aaron's question about being manufacturing upgrade. Is there a handful or specific transactions that or maybe a group of them that you see maybe in the 2017 or 2018 timeframe that is driving this as opposed to just larger revenue over the longer-term?

Peter Ungaro

No. It's really the latter. It's really just kind of overall revenue growth over time that we see and that opportunity that we see in the market with this convergence of supercomputing and big data and where we believe that we are positioning our company to take advantage of that that's really given to drive that. So it's not a specific huge opportunity or two, although there is clearly some of those out there, but it's really more about just the overall growth and what we need to support that with our customer base.

Brian Henry

Now we are clearly in the design that we consider building very large systems.

Alex Kurtz

Do you have the financing in place? Or are you guys going through line of credits right now and getting offers?

Brian Henry

So first, we have $285 million in cash. So it's gets more and more of opportunity that we will look at and alternatives and its still early in the process. And we are unlikely to finance the construction outside. But we are looking a some kind of more intermediate or permanent financing as we go along and look at the options and decide and actually take input from others on how you guys view different approaches as well.

Alex Kurtz

And just last question, Brian, just thinking about where the NOLs are going to likely finish up this year, is the mid-teen tax rate for next year a good starting place for 2017?

Brian Henry

Yes. We are really saying that on a non-GAAP basis about 10%. It can vary a little depending on the in mix. And then the full tax rate without any NOLs used is probably mid-30s maybe, between 35% and 38%.

Alex Kurtz

I was actually asking you to take a guess on 2017.

Brian Henry

2017? It depends on where we are on that. If you do the math, we had $76 million of NOLs. So to count that dollar-for-dollar against income and then we had $23 million of credits and divide that by 35%, so call that another $70 million or so. And so that's the combined amount of shield we have right now without generating any additional R&D credits.

Alex Kurtz

Okay. I will take it offline. All right. Thanks guys.

Peter Ungaro

Thanks Alex.

Operator

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

Peter Ungaro

Thank you. I am pleased with our 2015 results and our progress and prospects for 2016. We had strong competitive sales and we continue to gain momentum in the market. We are positioned to have a great year and continued success going forward. Thank you all for joining the call today and for your continued support of Cray. Have a great evening.

Operator

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

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