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Cray, Inc. (NASDAQ:CRAY)

F4Q07 Earnings Call

February 14, 2008 4:30 pm ET

Executives

John Snyder – Snyder Investor Relations

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

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

Kenneth W. Johnson - Senior Vice President & General Counsel, Corporate

Analysts

James McIlree – Collins Stewart, LLC

Chad Bennett – Northland Securities

Glenn Hanus – Needham & Company

Sid Parakh - McAdams Wright Ragen

Vic Kumar – Soundpost Partners

Operator

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the Cray, Inc. fourth quarter and year end 2007 conference call. (Operator Instructions) This conference is being recorded today, Thursday, February 14th of 2008. At this time I’d like to turn the presentation over to John Snyder. Please go ahead, sir.

John Snyder

Good afternoon. I’d like to thank everyone for joining us today. Participating from Cray are Peter Ungaro, President and Chief Executive; Brian Henry, Executive Vice President and Chief Financial Officer; and Ken Johnson, Senior Vice President and General Counsel. This call is being broadcast live on the Internet and recorded for replay purposes. A replay will be available shortly after the call and you can access the replay by dialing 800-405-2236. International dialers can call 303-590-3000. You must then enter the access code 11108526 followed by the # sign. A replay will also be available in the Investor Relations section of the Cray website for 180 days at www. Cray.com and during the course of this call management will make projections or other forward-looking statements regarding potential future events or the financial performance of the company. We want to caution that you such statements are current expectations and actual events or results may differ materially. Please refer to the documents which the company files from time to time with the Securities and Exchange Commission. They contain and identify important risk factors that could cause actual results to differ materially from those contained in the projections or forward-looking statements.

With that, I’d now like to turn the call over to Peter Ungaro.

Peter J. Ungaro

Welcome to everyone joining us on the call today. I’d like to start with some comments around our 2007 results and progress towards key focus areas for the year. Brian Henry will then discuss 2007 financial results along with our outlook for 2008. Following Brian’s comments I’ll discuss our priorities going forward and then we’ll open up the call for Q&A.

We made good progress in 2007 despite some challenges. On the positive side we improved our bottom line results and gross margins increased substantially both year-over-year and on a historical basis. These improvements were driven primarily by our product gross margins where we benefited from the improvements and the capabilities and price performance of our systems and ultimately the overall value of our systems against our competitors. This has been a major area of focus for us over the past couple years and an area where we have executed. Likewise we introduced the Cray XT5 Family of products at the Supercomputing Conference in November a line of products that offers the first truly hybrid architecture available in the marketplace. We had great customer response and excitement to the announcement and the challenge now or opportunity will be to leverage this excitement into new customer wins which we are busy working on as we speak.

We had a number of great customer wins and acceptances in 2007 both internationally and domestically and across our entire product portfolio. These wins include HECToR where we installed a flagship Supercomputing for the UK academic community. Housed at the University of Edinburgh in Scotland the Cray XT4 Supercomputer will assist scientists and researchers to satisfy the most demanding of scientific goals and push the boundaries of discovery. There has been tremendous excitement around this machine in the UK and at Cray given both the importance of the HECToR program and the performance of the machine which as exceeded expectations. For starters we delivered the machine in early August and passed all acceptance tests by mid-September. This is a tremendous accomplishment given the sheer size of the system and it has been great for Cray and great for the customer.

You might recall also that HECToR is a multi-phase project. The next phase which will provide hybrid capabilities combining the Cray XT5h Vector Supercomputer previously code named Black Widow with their existing Cray XT4. This is scheduled for the second half of 2008. We and the customer are very excited to keep pushing this program forward and to continue to enable scientific discovery in the UK. Part of the HECToR success can be attributed to the National Energy Research Center or NERSC in Berkley, California where we installed a Cray XT4 system with over 100 teraflops of performance and nearly 20,000 processor cores increasing the capability of the facility by almost a factor of 10. NERSC received the first large XT4 system with the Cray Linux environment and we ended up partnering close with NERSC in the first large bring up of that system. The partnership there has really been exceptional. NERSC is one of the most renowned supercomputing centers in the world and they choose Cray over their incumbent and other competitors because of the high sustained performance and scalability of our systems both required to address a rigorous workload in their production environment. NERSC has several thousand users who are now able to tackle the most challenging problems in the world of science and the Cray XT4 will enable them to conduct more frequent and increasingly detailed simulations and analyses of massive data sets.

And at Oakridge National Laboratory where we upgraded their system from a single core processor to dual core more than doubling their system performance to 119 teraflops. This marks another step in Oakridge’s leadership computing plans to provide their users with a pediscale supercomputer a thousand trillion floating point operations per second. We’re pretty excited about that.

We also had a tremendous year internationally where in addition to HECToR we had wins at the Swiss National Supercomputing Center, the University of Bergen in Norway, the Danish Meteorological Institute, the National Astronomical Observatory of Japan and Yokohama University in addition to some others. Not only did we have a number of important customer wins in 2007 the work that our customers have been able to achieve in terms of important scientific and engineering breakthroughs has been incredible. A number of our customers are doing groundbreaking work in areas such as weather forecasting, climate modeling and other geological sciences; in biomedical discovery, crash safety testing of automobiles and many other important and scientific and engineering fields. At Boeing a Cray Supercomputer was used to assist in the wing design of a 787 Dreamliner jet. Under the Dreamliner program Boeing engineers were able to reduce the number of physical wing design tests to 11 versus 77 wing design tests on the earlier Boeing 767 aircraft a 7 bolt improvement.

Clearly we’re excited about the progress our customers are making as are they. We are excited about the prospects that this offers as we move forward with our roadmap and as our customers move forward with their research and discovery ambitions. To further improve our ability to execute against our opportunities and support both customers and shareholders we really strengthened our leadership team with the additions of Andy Wyatt, the Vice President of our Asia Pacific Region and more recently Jill Hopper to Vice President of Government Programs and Ian Miller to Senior Vice President of Worldwide Sales and Marketing. We are excited to be able to attract really great people who are coming to Cray because of our vision and growing presence in the marketplace. On the more recent additions, Jill Hopper joins us with more than 20 years of government affair experience and has already taken over the leadership reins of our Government Relations office. Chris [Jayne] a long time Cray executive and previous leader of our Government Relations efforts is retiring. I’d like to thank Chris for his many years of work and dedication to Cray and wish him the absolute best in retirement. I might note that as Chris’ retirement gift we gave him a Ping driver designed of course on a Cray Supercomputer. I sure hope it improves his golf game.

The most recent addition which we just announced this week is that of Ian Miller. Ian is a tremendously important addition to the team as he’ll be leading our Sales and Marketing organizations from a global perspective. We’ve been looking for an opportunity to pull Sales and Marketing together into a single organization for some time now and with Ian’s experience and proven leadership capabilities we have the opportunity to do just that. Ian will assume Product Marketing and Corporate Communication responsibilities as well as direct responsibilities for our four Sales regions, Americas, Europe, Asia Pacific and Japan. Both Jill and Ian will report directly to me and I’m very excited to have them on board and to be working with them as we move forward.

Also on the positive side we improved our cash position significantly from the prior year ending 2007 with cash and investments of $179 million. This is at the high end of our internal targets and really exemplifies the improvements in our processes.

Now to the other side of the equation. The clear disappointments for the year are that we did not hit our key goals of growing revenue and achieving profitability. These have been and continue to be our top priorities so falling short in 2007 is clearly not where we wanted to be. The primary reason for the shortfall was a delay in component availability and product development. Quad-core XT4 Black Widow now called the XT5h and the XMT systems were all anticipated to be available and to contribute to the top and bottom lines in 2007. As a result of the delays 2007 did not benefit from these products. While we always have some risk in pushing the bounds of technology we clearly have focused on building up our execution capabilities to deliver on our plans for 2008.

Brian will take you through our expectations in this as part of our 2008 outlook. With that I’d like to turn it over to Brian after which I’ll provide some additional perspective on our 2008 priorities as we look to achieve solid results for the business.

Brian C. Henry

Good afternoon and Happy Valentine’s Day everybody. As Pete mentioned we had some great successes in 2007 and at the same time missed on a couple of key goals. We are not satisfied with our results and are that much more focused in moving things forward in a positive direction in 2008. We believe out outlook is positive and achievable and we are looking toward executing on it now. Before I get to the outlook let me first take you through Q4 and the full year 2007 financial results.

Fourth quarter revenue was $57.4 million compared to an unusually strong $101.4 million in the prior year. Product revenue was $43.3 million for the quarter with service revenue making up the remaining $14.1 million. For the full year of 2007 we reported revenue of $186.2 million compared to $221 million in the prior year, though in line with our most recent outlook clearly a disappointment and one that we expect to turn around in 2008. Product revenue for the year was $133.5 million with service revenue of $52.7 million. For the fourth quarter we reported a net loss of $3.6 million or $0.11 per share. This compares to a net income of $8.7 million or $0.33 per share in the prior year period. For the full year we improved the bottom line despite top line challenges by over 50% year-over-year. Net loss for the year was $5.7 million or $0.18 per share compared to $12.1 million or $0.53 per share in 2006.

For the fourth quarter total gross margin improved to 29.6% compared to 25.4% in the prior year. Product margin for the quarter was 25.9% and service margin was 40.9%. For the year total gross margin improved significantly to 35.1% compared to 28.9% in 2006. This was driven by improved product margins. One of our key priorities has been to improve gross margins and we have done so now three years running. Fourth quarter 2007 operating expenses were $21.9 million compared to $16.6 million in the prior year period. As anticipated operating expenses are higher in the quarter driven by increased research and development costs. The higher R&D is driven by the expiration of a significant development contract and moreover by a transition of our development efforts away from historically funded programs to more co-funded and Cray-funded programs. For analysts and investors who adjust results for other important performance measures included in the fourth quarter 2007 results were non-cash items of $3.8 million for depreciation and amortization and $0.6 million related to stock compensation. For the year these non-cash items amounted to $13.4 million for depreciation and amortization and $3.2 million related to stock compensation.

We ended the quarter and the year with a very solid balance sheet with cash and short term investment balances of $179.1 million. This compares to $139.7 million as of September 30th, 2007 and $140.3 million as of December 31st, 2006. Inventory decreased in the fourth quarter to $55.6 million from $72.3 million at the end of Q3. Inventory at customer sites at year end was $19 million.

I would now like to take a moment to discuss our outlook for the current year. First there is a wide range of potential outcomes for 2008 and quarterly and annual results will be affected by many factors including the level and timing of government funding, the timing and success of planned product roll outs, the timing and success of meeting certain development milestones and the timing of customer orders, shipments, acceptance, revenue recognition and margin contribution. We expect quarterly results to fluctuate significantly. For 2008 we are targeting profitability for the year and expect significant improved revenue over 2007. Revenue will be weighted heavily toward the second half of the year given the timing of planned product deliveries and acceptances. We anticipate initial revenue from quad-core XT4 and hybrid XT5h vector systems in the first half of the year and initial XT5 system revenue later in the year. We target gross margins in 2008 to be similar to the 2007 year end levels but will fluctuate significantly by quarter. We expect increased operating expenses for the year principally in the area of research and development where net R&D will likely increase by approximately 20% in 2008 compared to 2007.

Finally we expect to use cash over the course of the year as we build inventory for planned customer shipments. Cash usage will be particularly heavy in the first two quarters of the year. Though as always, we must overcome certain challenges. We are very excited about our business prospects for 2008. We are focused on executing against our plan. Our goals are aligned across the company with the firm intent of growing the top line and achieving profitability. Likewise we are focused on continuing to strengthen the business for the longer term so that we can grow, be profitable and create shareholder value.

With that I’ll turn it back over to Pete who will go through our priorities for 2008.

Peter J. Ungaro

Our priorities for 2008 align with our priorities in the fourth quarter of 2007 and our outlook for the year. Fourth quarter priorities were to win new business and to continue to make headway on our development projects. With respect to new business we have announced three customer wins since our last call. One at the Danish Meteorological Institute, another at the National Astronomical Observatory of Japan and most recently a contract to upgrade the Red Storm system at Sandia to a massive 284 teraflops. Sandia continues to be a flagship customer and a front runner for taking advantage of the unique upgradeability of the Cray XT Family of Supercomputers. By doing so Sandia substantially leveraged their original investment while achieving the Department of Energy’s ambitious computational goals. We’re very pleased with the long term partnership between Sandia and Cray.

In addition to these new customer wins we made tremendous progress in developing our pipeline of business. As Brian mentioned we anticipate strong revenue growth in 2008 and will continue to prioritize closing new business in the pipeline as we move through the year. Our pipeline is strong and we have built an operating plan to deliver these results.

On the product development front we made good progress and continue to drive toward the targets outlined on our last call. We began building initial quad-core Cray XT4 and prototype Cray XT5h vector systems in Q4 of 2007. These efforts have progressed and as Brian mentioned we anticipate initial revenue from these systems in the first half of 2008. Initial Cray XT5 system revenue is expected to be delivered in the second half of the year. This is a product that we and our customers are very excited about with industry leading density at 768 processor cores in a single cabinet and setting a new bar for our price performance and capability. Initial Cray XMT system deliveries are expected later in the year though we are not currently planning for any significant XMT revenue. We have work yet to complete on all of our products but we feel very good about the progress made in Q4 and are confident in accomplishing the milestones necessary to achieve our 2008 plan. As always product development will continue to be a priority. Finally we are absolutely intent on achieving profitability for the year. As such we’ll be focused on operational execution and cost controls. The challenge now is to continue to balance costs while driving top line growth and important product development initiatives. We are positioned well in the marketplace. We have a strong sales pipeline around the world and we have an expectation to grow the business and be profitable in 2008.

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

Question-And-Answer Session

Operator

Our first question will come from the line of Jim McIlree with Collins Stewart. Please go ahead.

James McIlree – Collins Stewart, LLC

I want you to know that I win a bet by saying Happy Valentine’s Day gentlemen. Can you tell me what’s happening with the XMT? Why is it being pushed into the latter part of the year?

Peter J. Ungaro

The XMT as you know we delivered our kind of first beta system this year and that we have to do a full process of re-spin on that product as we’ve talked about. So that’s going to take us a little bit longer than it took us to do the Black Widow or XT5h development process. It’s currently in development; we’re working through that process and expect to be delivering systems later on in the year with that re-spin that we need to do on the processor.

James McIlree – Collins Stewart, LLC

And I think we’ve talked about this before but is there a risk that you’d have to re-spin it again after this re-spin? And then before we can get to that one what’s the timing of the re-spin that you have scheduled right now?

Peter J. Ungaro

As I mentioned we’re in development of that, we’re working through all of those times. There’s always a risk that we potentially have to re-spin again and as we mentioned in the call we’re not planning any significant XMT revenue and we are expecting significant revenue growth so we’re happy with being able to balance those two things.

James McIlree – Collins Stewart, LLC

And the target customers for that is it possible for them to go to another system while waiting for this system to get ready for market?

Peter J. Ungaro

The XMT has quite unique capabilities and it’s a real differentiated system I would say out there. While we’re working with those customers to continue their applications development and that’s one of the reasons that you saw us ship a beta system out earlier this year we’re really targeting their applications for this specific platform in the market and there’s really nothing else out there that can do what this machine can do.

James McIlree – Collins Stewart, LLC

On the op ex side, Brian, you’re talking about R&D up 20%. What about the other two expense items? What’s your target for those for the year?

Brian C. Henry

I think they’ll increase modestly. A lot of the increase is really a function of how profitable we are. We tie incentive compensation to our profitability and we expect them to grow. They could grow higher if we’re very profitable and they’ll grow less if we’re not very profitable. We called out specifically because that would be abnormal and just to elaborate on that and perhaps answer the next question, why is that? The key is thing is we had a contract for a project, Black Widow or the XT5h, that the contract with the government ended in Q4 of this year, not even for the full quarter because product delays. We continue to work on that product to serve our targeted customers and so we have ongoing R&D for that. So instead of being kind of net neutral to R&D it now turns out to be a net cost to R&D. We’ll work through that in 2008. The biggest impacts for that are largely the fourth quarter and probably the first half of 2008. But we expect to have impact from that throughout the year and that’s the primary reason why we’re indicating that research and development expenses will be up for the year and it was the primary reason why R&D expenses increased higher than we wanted but that we warned could happen in Q4.

James McIlree – Collins Stewart, LLC

So does this stay at this $12 million level throughout the year or is there – I mean that would be much higher than 20% if it stayed at $12 million.

Brian C. Henry

Yeah, so we’re not forecasting specific quarters. I think what I indicated is in that ballpark, plus or minus, maybe higher. It varies by quarter depending on the mix of spending. It could happen in the first part of the year and then there may be offsetting things in part but the impact of Black Widow should be less in the second half of the year.

James McIlree – Collins Stewart, LLC

I don’t mean to hog the call but last one then I’ll get back in queue, can you give either a quantitative or qualitative answer to what was backlog at the end of the year?

Brian C. Henry

The way I would say it qualitatively, because quantitatively doesn’t slip my mouth, but from a qualitative point of view we’re well positioned for the year. We still have some orders to win. We have a good pipeline, as Pete said, and we’re well into some of those deals so that’s leant confidence to our statement that we expect revenues to grow significantly. But we don’t have all of next year in backlog yet.

Operator

Our next question comes from the line of Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett – Northland Securities

Just a couple questions, I’m trying to understand, Pete, on the XT4 quad-core and the XT5h, you said you were building systems in Q4 but were still yet to get the systems out the door, I believe you kind of indicated after. Can we get any type of timeline on if these systems are ready for production shipments? I know you said first half, but that’s a pretty vague term. Is there any type of color you can give there? And then talk about if we are still working out some kinks especially on the processor side of XT4, can you give us a sense of what the kinks are and if we’re 80% of the way through or where we are there?

Peter J. Ungaro

Let me just clarify the status. Last call that we did we talked about that our goals for the fourth quarter were to ship some initial systems both of XT5h and XT4 quad-core by the end of the year. We achieved those goals. So those are out. They’re early systems though. And we’re working through final testing and development of those machines as we bring them into production status and move those forward. We expect to begin shipping more systems over the course of the first half of the year and that’s why we think revenue is going to start to flow in the first half of the year for both of those systems. We do think that the revenue is going to start to pick up more in the second quarter but it’s always hard to call, Chad, if it’s going to be in March or April and how that’s all going to play out as far when the revenue will flow into each quarter.

Chad Bennett – Northland Securities

So the AMD quad-core ship, the Budapest chip is fine, we’re getting the unit volumes we wanted, it’s ready for production and there are no issues?

Peter J. Ungaro

No, just to finalize on that, sorry I apologize. I skipped over that one. I did mention we’re in final testing and development after our initial shipments. That’s going pretty good right now but we’re not through all of our testing. So I can’t give you an exact clear answer on that but I will say that we have systems out in the field today that are moving forward and we’re feeling good about them.

Chad Bennett – Northland Securities

Maybe another way of asking this is we believe the second half of the year is more back-end weighted than it was when we talked about ‘08 last call? Is that a fair way of looking at it?

Peter J. Ungaro

Yeah, that’s actually a great story. The second half of the year is more back-end weighted. A lot of that is driven from – you also noticed that we improved our outlook and talked about significant revenue growth in 2008 and that’s where you get more of the revenues, in the back of the year. I will say we’re really excited about the XT5 product line that we’ve announced and coming out with and it looks like to be a very competitive product in the market right now as evidenced by our pipeline around that product. So we are increasing our optimism around that product and think it’s going to drive a nice second half of the year for us.

Chad Bennett – Northland Securities

On your gross margin guidance, Brian, the flat guidance year-over-year, are we assuming any issues with contractual things or penalties or anything like that in that flat guidance?

Brian C. Henry

Good question, Chad, and the answer is yes. We are considering those things. We had some arrangements where we anticipated getting quad-core out, available and in production sooner than is likely to happen for well chronicled reasons and some of those have penalties of various forms and we’ve considered that. That has an adverse impact on our gross margin that was considered in the whole. The other thing is we’re shifting the mix a little bit as we look into significant growth opportunity in 2008 and we’ll have more of our XT4, XT5 line that carries with it lower margins and then of course margins vary with the mix including how much are upgrades, how much storage, etcetera there. So those are all factors. We’re going to work hard to get the best gross margins we can, get the best prices, minimize the penalties, but we had to weigh everything we knew at the time and our best guess right now is to be about the same as it was in 2007.

Chad Bennett – Northland Securities

And then, Brian, another question for you, I’ve asked this question before so I’m prepared for an answer, but cash obviously popped up very nicely at the end of the year probably due to an early NERSC shipment and whatnot, but how should we think about normalized cash levels if we look out in the next year and normalized inventory and receivables? I know its Cray and normalized is a bit of a stretch but is there a way to look at where we should be mid-year or second half of the year in terms of a cash level or inventory level assuming we’re projecting pretty significant revenue growth?

Brian C. Henry

I think the first point is, is that for the year we anticipate using cash because we really had a terrific fourth quarter. A lot of things came together in collections. Receivables for example are in very good shape and quite low so that’s gets us off to a slower start on new collections as we enter the year and because the weighting of our business as we’ve indicated in the call is heavier to the second half of the year and that revenues are going to grow so we’re beginning to buy stuff for those big opportunities in the second half of the year, we do think that we’re going to use a pretty level of cash in the first half of the year. Hard to say what the low point will be and when it will be and hopefully it’s short term in duration. We do anticipate using cash for the year but we still expect cash to be very nice at the end of the year. While they may start out very high, dip a little bit, we anticipate reasonable recovery in the second half of the year, particularly the fourth quarter. Do I think it’s going to be $179 million at the end of the year? I hope so. I’d probably get a better bonus if it was. I have a feeling that it’s going to be lower than that.

Chad Bennett – Northland Securities

I would assume so but you’ve exceeded expectations every quarter and you always cash is going to be lower so I had to ask the question. The $19 million of revenue at customer sites, do you care to say what that is? Is it quad-core, XT5 stuff or XT5 h stuff I should say?

Peter J. Ungaro

It’s predominantly XT4 quad-core and XT5h being the factor systems.

Operator

Our next question comes from the line of Glenn Hanus with Needham & Company. Please go ahead.

Glenn Hanus – Needham & Company

Should I assume that the breakout on the margin that the service will be roughly in that 40% range and the balance would be the – service would stay around 40% and whatever product works out to get to the 35% area is how to look at it?

Brian C. Henry

I think that’s the best way to look at it. We anticipate growing service in 2008 over 2007. Margins we would hope to improve a little bit but I think it’s a fair view. Some of that growth is coming from professional services and there may be some additive startup costs before we get the full benefits for that.

Glenn Hanus – Needham & Company

So should we think about service’s growth as relatively modest compared to product revenue growth?

Brian C. Henry

Yes.

Glenn Hanus – Needham & Company

When we had talked some time ago, you were more comfortable, Brian, with the first half of the year and you were struggling a little bit with visibility in the second half of the year, and maybe you could talk about what’s changed. Is it that you’ve landed some new deals or is it more slippage of product availability such that more shipments come in the second half of the year?

Brian C. Henry

I’m going to let Pete answer this one.

Peter J. Ungaro

As I mentioned a little bit before we’re starting to firm up our pipeline as we move forward of course, the pipeline starts to firm up and it’s very robust. What we found is the XT5 as we were focused on the development of that we’ve mentioned to you guys that it really breaks some new ground as far industry leading density of our products as well as getting us to a new price performance level so that we’re able now to really go after a broader range of opportunities and that’s really given us a lot of confidence in the second half of the year.

Glenn Hanus – Needham & Company

So is it that you won some significant incremental business or is it more that you’ve got the XT5 and you like it and you’re just feeling that your prospects are better?

Peter J. Ungaro

We’re feeling that the opportunities in the pipeline. So we haven’t announced too many XT5 wins yet but we are talking with a lot of customers and getting a good feeling for its competitiveness out in the marketplace and as we were hoping for in the development and as we expected, it looks really competitive.

Glenn Hanus – Needham & Company

Any update on the whole DARPA situation?

Peter J. Ungaro

Yeah, I’m glad you asked. We had a couple milestones in DARPA as we mentioned in the past last year. We successfully passed both those milestones last year so that program continues to be a very important development effort for us in developing our products out toward the end of the decade and moving forward really successfully. So we’re getting ready here in the second quarter to probably have our next major review of that program with the government. Things continuing in a very positive way in that program.

Glenn Hanus – Needham & Company

Anything regarding the whole Federal budget situation and how that’s impacting your view on your guidance in next year and funding and all that?

Peter J. Ungaro

That’s another great question, Glenn. As you can imagine we’re feeling pretty good about our revenue growth in 2008. I think we mentioned the word significant a number of times today but a lot of that is we’ve gotten some great feedback from the government budget, both what we think what we know is happening in fiscal year ‘08 for the government which really impacts our ‘08 as well as current views of what ‘09 is starting to shape up with, at least as far as the President’s budget that has gotten forward. So we’re feeling very strong that supercomputing continues to be a priority for the US government, both in terms of achieving their mission as well as for industrial and national competitiveness issues. We’re feeling pretty good about the Federal budget and I’m really excited to have Jill Hopper join the team who’s got a lot of experience in this area and is leading us through that.

Operator

Our next question will come from the line of Sid Parakh with McAdams Wright Ragen. Please go ahead.

Sid Parakh - McAdams Wright Ragen

Can you talk a little bit more about the progress you’re making in international geographies? I heard Japan a couple of times and I think you’re talked a little bit more about the international stuff that you’re doing in recent times. Can you elaborate on that?

Peter J. Ungaro

Sure and welcome back from your international endeavors by the way. 2006 was a great year in Europe. The European team really stepped forward and won a number of very large wins of course in 2006 capped off by HECToR and so our European geography is really growing quite quickly and very nicely. In Japan we had a number of good wins at Yokohama City University as well as at NAOJ there in Japan so those are really are biggest wins to date in the Japanese geography. We’re really making some very, very good progress in Japan. One other thing that’s gone on in Japan which is kind of unique for is we actually partnered with a cluster company, APRO, in jointly proposing a large system there that was won at the Scuba University where we provided the professional services of that opportunity which I think is another good indicating that we’re getting some growth in the professional services side of our business which Brian talked about earlier. And then in the AP region which we count everything outside of Japan in Asia Pacific we just brought on Andy Wyatt to lead that area for us and we have a number of good opportunities right there in that region and the pipeline is really starting to firm up. So we really feel like we are making some great progress. We did almost 40% of our business last year in 2007 outside of the US so it was another really good year on the international side and continues to be a growth driver for us.

Sid Parakh - McAdams Wright Ragen

So when you look at 2008 are you expecting more revenues, more than 40% of your revenues coming from international or is it going to be about the same or less?

Peter J. Ungaro

It’s a little too early to call that, Sid. We do expect international to continue to be strong for us although I will say a lot of, when I look at the pipeline, we have a lot of upside opportunities within the US geography this year. So the balance may be a little different but I still on a dollar value perspective versus a percentage perspective, I do expect international to continue to grow.

Sid Parakh - McAdams Wright Ragen

Now, as you look at 2008 it seems like you’re fairly confident about your outlook, but how does visibility improve for 2008 as the year progresses? What I’m trying to figure out is do we hear more about new orders or contracts over the next two months or is it more a mid-year event?

Peter J. Ungaro

Great question and you know we’re always careful in talking about that but we have a number of opportunities in various stages of the pipeline a few of which are quite far down the pipeline and we’re in kind of final discussions or final competitions in short list kinds of scenarios and such. We do expect that you’ll see that in announcements of wins that we’ll have across the year as we go forward.

Sid Parakh - McAdams Wright Ragen

And then finally we’ve talked about backlog or numbers for backlog as last as I think mid to late last year and I think that number used to be in the $600 million to $700 million range. Now it seems that even at that point we had talked about 2008 being kind of the hole that you need to fill up with new orders, as you look at the backlog today, I mean how do you see it distributed between 2008, 2009 and 2010 and is there any sense of what those numbers should look like probably some time early next year?

Brian C. Henry

Sid, we don’t give out backlog numbers and even trying to define it between years. I try to best characterize it. I’m not sure exactly the number that you got but I think that included the combination of wins that we had including the DARPA $250 million R&D contract that was won in late 2006 and some of the other contracts there in addition to a series of wins that we had totaled quite a big number in a short period of time. Obviously some of that went into backlog at the time, if not all of it. But we began shipping out of some of those orders to date. All I would say is that we need to win some more business in order to achieve our goals. We’re pretty confident that we will win sufficient business and we start out in a good situation because as you know if for no other reason some of the things that we had orders for last year and anticipated to ship because of product delays have moved into 2008.

Operator

Our next question will come from the line of Vic Kumar with Soundpost Partners. Please go ahead.

Vic Kumar – Soundpost Partners

I had a couple of product related questions, one I wanted to ask about, any remaining issues with quad-core availability right now, the component issue that you had in 07? Anything like that still occurring?

Peter J. Ungaro

Nothing outside of what we just talked about with the earlier question on this. So that’s our main component issue and as we mentioned we started to ship early versions of that product already.

Vic Kumar – Soundpost Partners

So it shouldn’t be an issue going forward I guess?

Peter J. Ungaro

It’s impossible for us to predict if we’re going to have component supply issues or anything like that going forward. We clearly our building an operational plan on delivering on the revenue growth that we’re expecting this year. So we feel like we have the situation moving forward in a positive way and we’re working through these last problems.

Vic Kumar – Soundpost Partners

The other one I wanted to ask about was the XMT, I thought during the last conference call you guys had talked about initial deliveries and revenue for XMT in mid-2008. Has that been pushed back then it sounds like or has there been some other issues with XMT?

Peter J. Ungaro

As I mentioned earlier with Jim’s question, we did announce that we were doing a full re-spin of that processor ship and that full re-spin, the development is continuing to do that work. We’ve been cautious in that we want to state that we are expecting to ship product this year at some time in the year but that we’re not planning for any significant XMT revenue.

Operator

Gentlemen, at this time we have no additional questions in the queue and I’ll turn the conference back to you for any closing remarks.

Peter J. Ungaro

Just to reiterate, our goals for 2008 are to grow the business and to be profitable. Our key focus areas for doing just that are delivering against our product roadmap and closing new business around the world. Our long term goals remain unchanged, innovating to achieve supercomputing market leadership and sustained profitability. I want to thank all of you for joining us on the call this afternoon and for your continued support of Cray. Happy Valentine’s Day.

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Source: Cray F4Q07 (Quarter End 12/30/2007) Earnings Call Transcript
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