Silicon Graphics F1Q08 (Qtr End 9/28/07) Earnings Call Transcript

Silicon Graphics, Inc. (SGIC)

F1Q08 (Qtr End 9/28/07) Earnings Call

November 06, 2007 5.00 pm ET

Executives

Lisa Pistacchio - Media Contact

Bo Ewald - CEO

Kathy Lanterman - CFO

Analyst

Glenn Hanus - Needham and Company

Jeff Cohen - Southpaw Asset Management

Alex Zyngier - Deutsche Bank

Ashish Kishore - Whipper Wheel

Asif Khan - Morgan Stanley

Presentation

Operator

Good afternoon my name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Graphics First Quarter Fiscal Year 2008 Earnings 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. Ms. Pistacchio, you may begin your conference.

Lisa Pistacchio

Thank you. Good afternoon and thank you for participating in this call. With me today are Bo Ewald, our Chief Executive Officer; and Kathy Lanterman, our Chief Financial Officer. This call is intended to elaborate on a news release issued earlier today to report our financial results for the first quarter, fiscal year 2008, which ended on September 28, 2007.

Before we begin, I would like to remind you that the matters we are about to discuss, other than historical financial data, are forward-looking statements and are subject to the risks and uncertainties described in our SEC reports, including our Form 10-K for the year ended June 29, 2007. The information provided on this call as of September 28, 2007 and we do not undertake to update this information during the quarter. Actual results may vary.

During the course of this conference call, we will describe certain non-GAAP financial measures in an effort to provide additional information to investors. These should be considered in addition to and not in lieu of comparable GAAP financial measures. Please refer to the Investor Relations' section on our website at sgi.com/investors for the most directly comparable GAAP financial measures and the related reconciliation. This conference call is open to the public and is being webcast. An audio recording of the call will be archived until November 30, 2007 on our website. At the conclusion of our prepared remarks we will have a Q&A. With that introduction I will turn the call over to Bo.

Bo Ewald

Great. Thanks Lisa. Today I am going to give you an update on where we are and where we are going. And first I will cover two key topics related to the quarter, progress on our highest priority operational objective for FY'08, i.e. our bookings growth. And secondly, continued stability as we strengthen our foundation for growth. Then Kathy will cover the financial details of the quarter and I'll comeback to talk about our going forward strategy and some things to watch for in coming quarters.

But first with regard to the first quarter, as you know we're determined to grow this business starting this year. Our highest priority is to grow our bookings or orders as we sometimes call them. And that will drive revenue growth and propel us forward in our longer range business plan.

In Q1, we were successful in that first step: delivering growth in orders. We had a 43% increase in bookings over Q4, and while I'm pleased with our order growth, I'm even happier about the composition of those orders.

We saw a strong bookings growth in the industrial sector. And we achieved growth across all of our segments without booking any deals valued at more than about $5 million. And while we acknowledge and really value the role of the very large deals in our business, a key to our growth is strengthening the foundation in our run rate business, as we call it, which typically has shorter sale cycles, more predictable margins and a faster turn to revenue.

We had key successes across our markets, including increased penetration in defense and intelligence, and in the industrial sector, in large and small transactions. These successes provide us with early validation that we are on the right track with our strategy to regain a foot hold in industrial accounts, particularly with a focus on hybrid computing.

A few key wins that I would like to highlight are: first, Honda Racing in the UK, where we installed the 1024 core ICE machine to support Formula One racing. This is an example of our initiative to regain markets strength in the automotive sector.

Secondly, Vandenberg Air Force Base, where we installed storage technology to create an all digital media production environment, this is used to support spacecraft and missile programs with US Air Force as well as NASA and the National Weather Service. This is crossover story, where we were able to apply our media industry expertise to solve similar problems in the government space. Enabling that increased government penetration we've discussed.

Thirdly, the University of Exeter purchased an additional 1152 core SGI Altix ICE 8200 system, and a SGI InfiniteStorage complex to compliment the first ICE system that we shipped just three months ago. And that one was a 128 core system used to stimulate the formation of stars and planets. That first system was installed for the theoretical astrophysics group and we had it up and running the same day it had arrived.

Moving on to Idaho National Laboratory, in just a day and half engineers at Idaho National Laboratory deployed a 2048 core 4 terabyte memory Altix ICE cluster, I&O researchers are using this system to run a range of applications such as computational chemistry, computational fluid dynamics and subsurface flow modeling.

At NASA Ames Research Center, a 4096 core 4 terabytes of memory SGI Altix ICE system was up and running in only 8 days. The systems serves NASA's aeronautics research mission directorate, the scientists and engineers are working to transform America's air transportation system and to support feature air and space vehicles.

Tata Consultancy Services Limited in Bangalore, India needed a powerful new infrastructure for their power trend business unit to support the demands of a new contract from a very large automaker. They selected a full complement of high performance compute, cluster and storage solutions from SGI, which included an SGI Altix 4700, several SGI Altix XE clusters, an InfiniteStorage 120, and an InfiniteStorage 220 system, again part of our integrated hybrid computing solutions that we'll discuss in a few minutes.

And while we strengthened that foundation for growth with our bookings, we also did what we said we are going to do operationally. We continued to see stable pro forma revenue in Q1. Our expenses were under control. And we had results in line with our operating expectations including, first, we beat our Altix ICE revenue plan and we were pleased with our results across the entire server product line.

ICE is the blade-based server that delivers break through performance, reliability, power and cooling, and efficiency that we introduced in June. You can see from the examples I just mentioned that it's setting a new standard in the industry for speed of deployment. We are also proud of the performance of ICE and we're looking forward to seeing how ICE places in next weeks top five hundred announcements at Supercomputing.

We also executed on our objective to launch InfiniteStorage NEXIS, in September we introduced NEXIS, NAS solutions that delivers HPC performance and scaling with enterprise class ease of use.

We also introduced Support Solutions Plus, which is a portfolio of services including multi-vendor support. Our customers value the relationship they have with the company, and our understanding of their workflow, and we find that many of them would rather work with us for most or all of their system support.

During the quarter, we achieved acceptance on a 9000 core installation at Wright-Patterson Air Force Base. And while we were proud of achieving that acceptance, we are very pleased that we did it in a time frame ahead of customer expectations. Less than five weeks after delivery of the first piece of hardware, we are running Linpack benchmarks across all processors.

This is a great example of our ability to deliver, to deliver performance, and deliver it in a way that reduces complexity by coming up and getting the system in use very quickly. We believe that this was the fastest time from shipment to production of any of the large systems that are part of the DOD modernization program.

In addition to those customer and product successes, we announced the record breaking result on the Oracle Application Standard Benchmark, some of you would know it as OASB, where our SGI Altix 450 delivered twice the performance of the previous record holder in test that measured the average response times for 2000 online users.

We believe this performance and resulting price performance value proposition will set the stage for our entry into a slice of the broader enterprise market that we call high performance business, for applications in which there are large databases that have to be analyzed quickly.

At our last call, we announced the appointment of Shahin Khan to our team to lead the charge in maximizing the value of our intellectual property. While he reviews the portfolio and develops plans, our litigation with ATI continues. We had our claims construction hearing last month and have trial date set for February. Shahin is also focused on identifying technology elements that are missing from our current portfolio, and identifying an action plan for those.

Today, I'm also very pleased to announce that Doug Britt has joined our team as Senior Vice-President of World Wide Sales. Doug joins from Solectron, where he was responsible for leading the sales and customer operations of Solectron's roughly $12 billion business.

We'll bring him in to talk to you in the future, after he has had a chance to get his feet on the ground here. Now, let me turn it back over Kathy to review the financials with you, then I'll be back to talk about strategy.

Kathy Lanterman

Thanks Bo. As we said last quarter, here's how we evaluate the progress of our business from a financial stand point. First, we look for growth in Altix servers, next we look for growth in storage, than we're looking for momentum in orders for products and professional services received in the period, and lastly our success in recapturing business in our core markets, including both government and industrial.

In evaluating the first quarter fiscal 2008 results, we were pleased to have seen significant progress in three of these four metrics. As Bo said we're pleased with the stability in our pro forma revenue that continued during the first quarter, particularly in Altix servers.

And this our sixth consecutive quarter with pro forma revenues ranging form a $120 million to $140 million, reversing the prior downward revenue trends. We're pleased with the underlying order momentum that we're starting to see, as well as the traction we're beginning to see in the industries that we're focused on.

The one disappointment in the quarter was the results from our storage business, which declined and felt short of expectations. As Bo said, we achieved the introduction our InfiniteStorage NEXIS product at the very end of Q1, which was later than originally planned, and that did have a negative impact on the storage results in the first quarter.

Overall our pro forma results for the first quarter came in close to our first quarter financial goals, as over performance in Altix servers made up for some of the shortfall in storage.

A few of the other financial highlights in the results were, GAAP revenues in the quarter were significantly impacted by revenue deferrals for SOP 97-2, Software Revenue Recognition. Our deferred revenue balances are growing significantly as a result of these deferrals, which we believe will ultimately result in a positive impact on our future GAAP revenues.

Our largest transaction in Q1 was $20 million, which was deferred on a GAAP basis, but is included in our pro forma results. In the fourth quarter, our largest transaction was $40 million the revenue for which was included in both our GAAP and pro forma numbers.

We continue to have strong performance from our Altix severs. Altix severs pro forma revenues stayed relatively flat compared to the prior quarter, in spite the overall lower revenue and achieved 41% year-over-year growth.

In addition, we managed cash to our plan, we kept cost under control, we managed pro forma gross margins to our fiscal plan, which called for declines compared to the year ago quarter, driven primarily by product mix. And we achieved a restructuring of our credit facility eliminating most financial covenants through December 2008.

Now I'll run through our GAAP results for the first quarter, and a more comprehensive review of the pro forma numbers will follow later.

On a GAAP basis, for Q1 2008, revenue was $91.1 million at a 30.2% gross margin. Operating expenses were $54.7 million, yielding an operating loss of $27.2 million and a net loss of $36.2 million. As of September 28, 2007 backlog, which we define as orders for products and professional services that are expected to be delivered within the next nine months were $65 million, down from $66.5 million at the end of June 2007.

At the end of June a single transaction accounted for approximately $20 million of the backlog. At the end of September the largest single deal in backlog was approximately $6 million. While large deals will continue to be an important part of our business. As Bo said we have been highlighting the value of increasing our run rate business for sometime and are pleased with the indicators of success in these efforts in the first quarter.

As of September 28, 2007 unrestricted cash, cash equivalents and marketable investments were $55 million down $15 million compared to the prior quarter and in line with our goals for end of quarter cash.

The maximum amount drawn on a revolving line of credit during the quarter was $3 million for a period of one day and it was un-drawn at quarter end.

As of September 28, 2007, our head count was 1,594 compared to 1,588 as of June 27, 2007. We continue to be able to attract and retain top quality people.

As previously noted, the company uses certain pro forma financial measures that are not calculated in accordance with GAAP or non-GAAP financial measures, because management believes that these non-GAAP financial measures are useful to investors to facilitate period-to-period comparisons of SGI's performance. And because they help investors view the company results of operation through the eyes of management and the company's lenders.

I'm now going to provide you with the summary of the pro forma financial results for the first quarter of fiscal year 2008.

On a pro forma basis, revenue for the first quarter was $120.7 million, as compared to $141.5 million in the fourth quarter of fiscal 2007, and $127 million in the first quarter of the prior year. The primary reason for the difference in pro forma revenue between the fourth quarter and first quarter was the magnitude of the large deals.

In the fourth quarter of our pro forma results included a single $40 million deal, while in the first quarter, we had a $20 million deal. That first quarter deal made up the majority of the delta between the GAAP and the pro forma results in the quarter, as that revenue was deferred according to SOP 97-2.

When comparing to the year-ago quarter, well, the non-GAAP results show a slight decline relative to the prior year. On a disaggregated basis, we saw significant growth in our core products business. But that growth was not sufficient to overcome declines in our legacy products and customer support businesses.

We were particularly pleased with the pro forma revenue growth achieved in our Altix servers, which grew 41% year-over-year and declined only slightly quarter-over-quarter despite the overall revenue decline.

Our storage revenues in the quarter were disappointing, as I noted earlier. A detailed summary of our pro forma revenue by product is included as an attachment to our press release and can also be found on our website.

Now referring to our pro forma results, geographically the mix was 74% in the America, 15% in Europe, and 11% in rest of the world in the first quarter. This represents a typical shift towards the Americas in our geographic split in the first quarter, which is traditionally slow for us in Europe.

Our pro forma gross margin in the first quarter was 34.3% as compared to 35.2% in the fourth quarter, and 38.7% in the first quarter of the prior year.

Operating expenses, before restructuring and other related charges in the fourth quarter, were $51.5 million, down from $53.2 million in the prior quarter and $62.2 million in the comparable period a year ago. This resulted in a pro forma operating loss of $10 million in Q1 fiscal year 2008, compared to an operating loss of $3.4 million in the prior quarter, and an operating loss of $9 million in the same period one year ago. But we have not yet achieved operating profitability. We are executing to our plan, which for this year is focused on making the investments necessary to drive more business volume. And we feel we are on the right track with that strategy. As we drive increases in orders, revenue and ultimately profitability will follow.

Our adjusted EBITDA, which by definition is a pro forma measurement and is calculated based on our pro forma operating income was negative $3.8 million in the first quarter, compared with a positive $2.8 million in the fourth quarter, and negative $2.6 million in the year-ago quarter.

We regularly evaluate the financing alternatives that are available to the company. Last week, we filed a shelf registration statement on the first date that we were eligible to do so to provide flexibility to the company, and that flexibility is what we are looking for.

If we decide to access an offering, we will file a corresponding amendment to the registration statement or a prospectus supplement with the SEC.

In fiscal 2007, we laid the financial foundation for our business. We see significant opportunities to grow and built upon that foundation and view fiscal 2008 as a critical investment year. We remain confident that we have a solid long-term strategy.

Now, before I turn the call back over to Bo, I'd like to remind you that we will have Q&A at the end of the session. So, in order to ensure that we can address your questions, please get into the queue within the next few minutes.

And with that, I'd like to turn the call back to Bo to discuss more on the company's strategy.

Bo Ewald

Great. Thanks, Kathy. So, now let's switch gears and talk a little more about the future. I rejoined the company about six months ago and I visited with many customers, most of the people in the company and lots of experts from all around the industry. And all of that has served as input to our strategy of which there are three major parts, the company strategy, our evolving business model and the capital structure of the company to support the other two.

Today, I'll focus on the company's strategy with a glimpse into the business model. Basically, our customers do three things over and over again. They compute things. They save the results, and they look at the results. And our mission is to provide the best of products for each of those three areas and then integrate them into a more complete solution that is available from other suppliers.

There are four key technology elements to the strategy. First, at the very heart of what we are doing, is a set of core platforms that we all provide and leverage across the three product areas to maximize the return on our investment.

In terms of the platforms that we will develop around that core are compute platforms to do to calculations; secondly, visualization platforms to enable a customer to see the results and interact with their models; and then thirdly, storage platforms to provide both immediate as well as long-term data storage. Then to take those products to market, we want to be very focused, our approaches to gain market leaders as our customers' segment by segment and then go deeper in the segments and eventually move to include other vertical segments as well.

So, for this year, we are focused on four market segments. First is defense and intelligence, our largest market segment today, where we have a strong presence and an opportunity to grow and be a large player for both immediate requirements as well as long-term programs.

Second segment is industry. This year we are focused on reestablishing the company in vertical industry segments that design and manufacture products, automotive, aerospace and manufacturing and we'll expand into other industries as we move forward.

Third segment is research, and here we have a great presence and expect to grow at selected national research centers or national laboratories and universities. And the fourth is what we call high-performance business. This is a slice of the broader enterprise market, but our target application is with folks that have a large amount of data, where a time critical decision is required. So, think of us of this high-performance business as big data fast analysis.

We have also heard over and over from customers that they love the promise of free software based on Linux. But free really isn't free, that they have encountered additional complexity. The performance of Linux-based clusters in many cases isn't in the same league as the shared memory systems as they are used to, like our Altix servers.

So, we are asking all of the people in our company to help us do two things for our customers. First, reduce complexity, and then secondly, deliver performance. In that vein, on the technology side of our strategy, you'll see us working on two major new projects, in industrial-strength Linux environment or ISL, either, we will call ISL and hybrid computing.

First, the industrial strength Linux environment is aimed at integrating all the software that sits on top of the Linux operating system into a more coherent integrated set of software to reduce complexity and improves system throughput in individual application performance. So, in a sense this is similar to what Red Hat and Novell do for the core operating system, but we'll do it for the next layer where folks are doing system administration, submitting jobs or developing codes operate.

Then hybrid computing is our project with which we enable customers to put our shared memory Altix servers side-by-side with our ICE or XE machines that use the Intel Xeon processors and send the applications to the system, which is best suited for the particular application. This effort also establishes the base line technologies for future platforms that we are working on.

Moving on to visualization, we are going to introduce our visualization strategy at the Supercomputing '07 conference next week. And I don't want to get too far ahead of that announcement, but you'll see us addressing the changing needs of the visualization market with a visual supercomputer that leverages our investment in compute platforms in some of the software the company has developed in the past.

On the storage side, you will see us provide three classes of storage platforms; directly attached, NAS solutions, like our new InfiniteStorage NEXIS product and SAN systems, and providing our leading data management software called Data Migration Facility or DMF and our parallel file system, that's called CXFS. We also integrate our storage hardware and software with our compute visualization platforms to enable us to better meet the customers' complete requirements.

So, in summary, you will see us; first, invest at a set of core platforms that we leverage for compute visualization and storage; second, wrap those in an industrial-strength Linux environment to reduce complexity and improve performance; thirdly, deliver a more complete set of services and solutions around that combined hardware/software environment and then target those at our core markets.

You will also see our business model above and although, we may not like it, we do expect lower margins on the commodity base compute platforms. So, we will aim to offset that by licensing more of our software by ISL and by adding more consulting solutions and professional services, and believe that in doing that we can achieve a blended gross margin similar to that of today.

I continue to receive strong validation of our directions from our customers, investors, and outside industry analysts. Just like week, where were at GEOINT, which is a symposium of the United States Geospatial Intelligence Foundation down in San Antonio. We met with our leading customers in the segment at the symposium and we heard resounding affirmation of our strategy including our completion of the product portfolio, our hybrid computing offerings, and our vision for an industrial-strength Linux environment. We have great presence in this market space and I was delighted with the reaction at the show.

So, as we move through this quarter and the year, here are few things you should look for as proof points that we are making progress. First, our number one objective is order growth. As you may have seen last week, we were delighted to reach an agreement with the New Mexico Computing Application Center for a 14000 core Altix ICE Machine.

Also this quarter we've had a significant win at Chrysler, where we will install a hybrid computer solution in their design process. And again this is building on the great momentum that we started here in Q1, where our bookings growth was up 43% compared to the previous quarter.

Secondly, look for products that line up with our strategy, including visualization, which will be announced next week. Hybrid computing, which is driving our success in the industrial sector, and our vision for an industrial strength Linux environment. And thirdly and finally we continue to watch for intellectual property activity, including acquisitions as well as moves to protect our extensive patent portfolio.

So, in summary we're very pleased with the traction we saw in our Q1 bookings, we have the right strategy, and we believe we can execute to deliver growth. Now if there are questions we can take them and thanks for joining us.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Glenn Hanus with Needham and Company.

Glenn Hanus - Needham and Company

Good afternoon and thank you that thorough rundown. Maybe you could talk about on the competitive front a bit. You went through a number of wins with the ICE machine and XE machine, how you are doing against HP and IBM, and how your win rates are, what developments you are seeing on the competitive front?

Bo Ewald

Great, thanks Glenn. As you pointed out in fact, the folks we compete with day in and day out are IBM and HP. On occasion we see Dell, but it really is IBM and HP, and we typically are going in to accounts where they are installed, and we don't break out our win rate, but as you could see from our increase in bookings this quarter compared to last quarter and compared to year ago, we in fact are getting great traction. We are growing faster than the market, the overall HPC market, as forecast by IDC it is growing, order of magnitude of about 10% a year or maybe just a little bit less than that.

So, in fact, we are growing quite nicely compared to that. So, we feel very good about the product line up that we have. The set of software that we have. The customers really relate to the strategy that we are developing around hybrid computing and industrial strength Linux environment. And, in fact, most of that we are the company again that will have best of breed compute visualizations, storage platforms as well as integrate in to this environment. So, if those bigger companies want to buy business they certainly do that on occasion. But where it's a fair competition we win our fair share.

Operator

Your next question comes from Jeff Cohen with Southpaw Asset Management.

Jeff Cohen - Southpaw Asset Management

Hi, Bo, thanks for taking the call and congratulations on the quarter. Can you give us a little bit of a preview into the bookings this quarter and whether you are seeing the trend that you established in Q1 continue?

Bo Ewald

Hi, Jeff, thanks for listening in today. I don't want to get too far ahead of ourselves, but what we have and as you point out, we are really very pleased. The number one objective we have for this company is to grow bookings. And as the bookings grow the revenue will trail out a little bit, but it will grow and we will in fact grow in to our profitable business model.

So, first quarter was a great start for us, second quarter in fact as you have seen, you probably saw Governor Richardson in New Mexico's announcement few days ago, in fact we have been awarded the roughly $11 million system at the big New Mexico CAC. We have won the system that I referred to at Chrysler, and we have other things going on that we'll talk about, in about three months from now, I expect. So, Kathy is giving the hand signs so.

Kathy Lanterman

I'm sorry we are just not in a position to give kind of more detailed guidance at this point on the quarter. So, we are obviously optimistic as we exited the first quarter with the momentum we have in our business and beyond that we aren't really going to talk too much more specifically.

Jeff Cohen - Southpaw Asset Management

Can you talk qualitatively a little bit about where you are seeing that lift and where the interest is coming?

Bo Ewald

Yes, sure can. It's actually coming across the board. In the first quarter our bookings were in rough numbers about two-thirds in the US, which is sort of the way the business has been trending recently. We had an upturn in the number of bookings that we did or the volume of bookings that we did in Asia-Pacific and Japan, but they were over 20% in the last quarter.

And going forward, I should also say and you would have seen those bookings be for both small deals as well as deals that went up to $3 million or $4 million or $5 million. There were no huge deals in the quarter and frankly that was a very good thing for us as we tried to establish this foundation for the business or what we call the run rate business. Shorter sales cycles, more predictable, and faster turn to revenue than on some of the big deals. So, having said, you'll see us continue to go after selected over the very large deals. So, we are winning in defense and intelligence.

This show that I talked to GEOINT was just tremendous, just one little anecdote from that. On one of the evenings last week, I guess when that show was going on, the conference itself was over at 5 o'clock, and I had some meetings that were going until six. And then I had to go a reception that night. So, I was leaving the exhibit hall at six, and the exhibits were completely dark with one exception. And the lights were on in the SGI booth and there were about 30 people in our booth an hour after the show was over, about half of those were SGI employees and about half were customers in prospects.

So, defense and intelligence is strong and going for us. And then we are getting good traction in the industrial space again as we have pointed out. And then thirdly, the research business and MCAK is an example of that. And then it's just really starting on the high-performance business side.

Jeff Cohen - Southpaw Asset Management

And in terms of demand, are you seeing the demand in areas that you would hope, I mean is the demand coming from the core versus the legacy? Or how is that getting divided between the product lines?

Bo Ewald

Yeah. Qualitatively, the demand is for the new products, for the core products, particularly the servers. We noted several of our ICE machine wins, our Altix server wins, we were a little disappointed, as Cathy said with the storage uptake in the first quarter, but believe in fact that we have a good storage strategy and will take that up. And after the Supercomputing conference as we have the visual supercomputer announced [in ready shape], we expect to see an uptake with that.

Jeff Cohen - Southpaw Asset Management

Okay. Thanks very much.

Operator

Your next question comes from [Eric Ian] with Deutsche Bank.

Alex Zyngier - Deutsche Bank

Hi. It's actually Alex Zyngier here. Couple of things. I think you guys seem to be very excited and very happy about what's going on inside of the company. But let me throw a couple of things that I see out there. For the last seven months, our stock is down 43% from the top, okay? We are in all-time low since existing bankruptcy. And on top of that you guys go out file a shelf, which clearly you have just said that you don't have intention to sell right now, you have found amendments, if you intend to release your stock. But, there is clearly a big disconnect from what you guys are saying and what the market seeing.

So, I would like to know: what you guys are going to do about this? Because, my perspective is that it's clearly unacceptable. So, one thing is missing here. Either what you guys are doing, the market doesn't like or the market doesn't understand what you're doing. And if it's the second one, which is what I believe, we have to be out there. You guys have to be out there telling the story to a wider audience, not only older shareholders that own this from the bankruptcy?

Kathy Lanterman

So, Alex, Alex is the name?

Alex Zyngier - Deutsche Bank

Alex Zyngier from Deutsche Bank.

Kathy Lanterman

Alex, okay. Thanks for your comments. So clearly, you've thrown a couple of things into the question there and, as I noted in my script, we did file a shelf registration statement last week, and if we do intend to continue on with an equity offering, we will file our prospectus supplement. Beyond that in terms of the stock performance, the only comment I can really make is that the decisions that we are making and the tractions that we're trying to develop in the business is intended to certainly drive longer-term shareholder value.

We are trying sequentially, as we get on these calls, and I think this is just the second time or so on board for Bo to articulate our strategy little bit more clearly, to make sure that it's well understood in the market. But the dynamic of our stock trading is outside of our control. There are factors related to our company, as well as outside factors, that we can't have 100% control. And certainly the relatively tightly held nature of the stock doesn't help that. So, we take that all under advisement, and we are committed to trying to do the things that will ultimately deliver long-term shareholder value.

Operator

The next question comes from Ashish Kishore with [Whipper Wheel].

Ashish Kishore - Whipper Wheel

Yes. Thanks for taking the question. I just wanted to get little bit more qualitative perhaps information as to the server and the storage business out performance, relative out performance of server and relative underperformance on storage, what was driving them?

Kathy Lanterman

Hi, Ashish thanks for the question. So, we really believe that the strong performance that we saw in the Altix server line is it's driven by the fact that we introduced our Altix ICE product right at the end of June and only started shipping that in the first quarter. So, we clearly are pleased with the uptick of that product. But what we are even more pleased with is that we saw a performance across all of the product lines within our Altix server products, in our XE 4700, 450 as well as Altix ICE.

So, we were very pleased to see that. I think it's a validation of our hybrid computing strategy as we are seeing. And our penetration getting into some of these industrial customers, an uptick of not just one of our compute platforms but multiple and that's helping us kind of across the board there.

I think, if I look to our storage performance in the quarter, we did have a fairly strong fourth quarter, because there was a fairly sizeable contribution to storage from the $40 million deal that happened in the fourth quarter. But beyond that, our original goals have been to trying and get the NEXIS products out there in the market, to be able to be building a funnel for that probably earlier in the quarter, then at the end of the day we were able to deliver.

So, we got a little bit of slow start in building traction and the funnel for our new storage products. And we are working hard internally to get that momentum built back up, and really deliver out of our new storage products with the same type of success that we saw in our Altix ICE product launch.

Operator

Your next question is a follow-up question from Glenn Hanus with Needham and Company.

Glenn Hanus - Needham and Company

Do you want to comment at all on how you feel you are situated from a sales force standpoint? You went through some reorganization, and more of a vertical focus, has there been much turnover or is it stable now or are you planning to add to the sales force, and just your view of strengths and weakness of where that whole effort stands?

Bo Ewald

Yeah, so number one, I'd say that we did in fact reorganize the US sales force which is two-thirds to a little bit more of our business at the 1st of July, the start of our new fiscal year, along lines of the defense and intelligence segment, industry, research group, and then also the high performance business. So, we believe in fact, in having our sales folks to be experts and our SEs to be experts at helping customers solve the problems of the customer.

And so, first step was in fact to go to that more vertical alignment. That happened quickly and it went very well. We in fact then, as we moved through the quarter, we have lost very few sales people. We, in fact, have being adding to our sales people and our SEs as we've gone along and we would expect to see that continue.

Then, we had a sales kickoff meeting that we've just concluded. It was in the first week of the month of October. And without going into what we did internally, it was fantastic, the folks here told me it was the best of those things that had been in several years. They got a clear view of the strategy as we had developed it, what products we have, why those products were competitive, what markets to play in and we had some “funs” for building up the spirit of the company again.

So, I think you'll see us continuing to expand along these vertical lines as we have talked. And I think, most importantly for me, is that we are very pleased today to be able to announce that Doug Britt is joining us, most recently at Selectron. And Doug has tremendous experience. We'll have him here to be able to be on one of these calls. And, in fact, we do expect to be around to be meeting with investors and in some of the conferences in the future. So, you will be able to meet him as we move along as well.

So, we feel actually quite good about where we are, and I think in terms of number of people, and in terms of the quality of the people, the organization and the way that we are growing the business. And in the end, I can feel good about it, but the proof is in pudding, and we grew bookings 43% quarter-over-quarter, and 19% compared to year before. That's good.

Operator

Our next question comes from Jeff Cohen with Southpaw Asset Management.

Jeff Cohen - Southpaw Asset Management

Bo, just another follow-up, I don't know if you saw it today, but there is an article in the Wall Street Journal, titled "Big Computers, Big changes", and it kind of refers to the fact that there is a sense of change that is brewing within the industry. And that the multi core approach has some speed and performance limitations inherent in it, and that people are kind of looking for new solutions out of the super computing industry and groping a little bit for what that solution is going to be. I am wondering, one, if you saw the article and two if you might have any thought as to how SGI is kind of positioned in this landscape right now?

Bo Ewald

Thanks, Jeff. No, in fact, I saw in my e-mail that a couple of people had sent me the article and today's Wall Street is sitting somewhere in my office, but haven't had a chance to look at it, but certainly will. But the whole concept of multi-core, and many-core, has been coming for years and that's, sort of, part of challenge, or the problem, that we heard from these customers who we met with. In fact, it is with these systems. It is harder. There is more complexity. As the computers themselves get to more parallelism, it is harder to get performance out of them.

And then, because of all the disparate parts of the software. The Linux software that sits on top of OS, it just compounds the problem. So, our whole effort here to attack the complexity or reduce the complexity that the customer faces and deliver performance is aimed in large part, at the multi-core parallel computers or parallel technologies that are coming out and in fact, the reality is they are harder to use.

We think, we are frankly right in the heart of that fight to be able to make them easier to use, and faster that we go with our hybrid computing strategy, with our visualization strategy, with our industrial strength Linux environment, the better that our customers will be and therefore that we'll be as we move forward.

Operator

Your next question comes from Asif Khan with Morgan Stanley

Asif Khan - Morgan Stanley

Yes, Hi, guys.

Kathy Lanterman

Asif we just lost you, we just dropped you out?

Asif Khan - Morgan Stanley

Hello?

Kathy Lanterman

Yeah.

Asif Khan - Morgan Stanley

Can you guys hear me?

Kathy Lanterman

We can hear you now.

Asif Khan - Morgan Stanley

Hi, Kathy. Hi, Bo. Question I have is, I think you mentioned something about renegotiating the covenants on the credit agreement. Could you elaborate on that, because I believe the last credit agreement had some cumulative EBITDA covenants?

Kathy Lanterman

Yes, happy to elaborate that a little bit more. So, the facility still does have cumulative EBITDA covenants and they go out through the duration of the credit facility. But the renegotiation that we achieved in first quarter had a couple of different components to it.

So, first we do have several of our major shareholders actually do participate in our borrowing facility as well, and during the quarter they actually exercised their options to actually replace General Electric as the General Electric Credit Corporation, I think this is the full name as the lenders under revolving line if credit.

So, that allowed us to really unify the debt holders, and put in place some amendments to the credit facility that allowed the company to focus on developing our strategy in sort of executing a little bit more in mid term, without having this quarter-to-quarter focus on quarterly EBITDA results, we are now focus more on longer term.

And we were able to achieve a waver of compliance to the covenants. So, the covenants do still exist in the facility, but we've got a waver against the compliance of the covenants through December of 2008. And then if you look closely at the numbers you will see that the covenants actually reset the cumulative covenants, reset the higher amounts in couple of subsequent periods following that period.

So, that gives us about a year half to really focus on more mid term, mid term execution of our strategies. And at the same time the total dollar amount of the revolver was also reset, it was previously a $30 million facility with a requirement to hold $15 million in minimum cash at all times. The minimum cash covenant was eliminated and the total line was reset to $20 million; so effectively increasing the amount borrowing capacity by $5 million.

Operator

There are no further questions at this point, are there any closing remarks.

Lisa Pistacchio

Thank you for participating with us today. If you have any additional questions and would like to call back regarding our results, please contact us at 650-933-6102. Thank you.

Bo Ewald

Thanks everybody.

Operator

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

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