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Cray Inc. (NASDAQ:CRAY)

Q1 2008 Earnings Call Transcript

April 29, 2008 4:30 pm ET

Executives

John Snyder – IR, Snyder Investor Relations

Peter Ungaro – President and CEO

Brian Henry – EVP and CFO

Analysts

Chad Bennett – Northland Securities

Doug Reid – Thomas Weisel Partners

Sid Parakh – McAdams Wright Ragen

Vic Kumar [ph] – Soundpost Partners

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cray reports first quarter 2008 financial results conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator instructions) This conference is being recorded Tuesday, April 29, 2008. I would now like to turn the conference to John Snyder. Please go ahead, sir.

John Snyder

Good afternoon and thank you for joining us today. Participating from Cray are Peter Ungaro, President and Chief Executive Officer; 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 1-800-405-2236. International callers can dial 303-590-3000. You must then enter the access code 11113355. A replay will also be also available in the Investor Relations section of the Cray web site for 180 days at cray.com.

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. I want to caution you that the 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 the actual results to differ materially from those contained in the projections or forward-looking statements.

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

Peter Ungaro

Thanks, John, and welcome to everyone joining us on the call today. I would like to start with some comments around our first quarter results and progress towards key focus areas for the year. Brian Henry will then discuss first quarter financial results along with our outlook for 2008. And following Brian's comments, I will discuss our priorities going forward, and spend a few minutes on the announcement we made yesterday. We will then open the call up for Q&A.

Our goals for 2008 are to be profitable and grow. Now while progress isn’t clearly evident in our first quarter financial results, I will say that we made great progress this year towards positioning ourselves to achieve these goals. First, we’ve announced a number of great wins this year. These wins include four of the five high performance computing systems awards by the Department of Defense as part of its 2008 HPC Modernization Program. This award calls for delivery of four Cray XT5 systems to be located at top military research centers, including the Army Research Laboratory, the Naval Oceanographic Office, and the Arctic Region Supercomputing Center.

Other wins this year include an upgrade to the Sandia Red Storm system, doubling the performance of that system from 124 to 248 teraflops. The Red Storm upgrade will allow researchers and scientists to run even higher resolution models and increase the accuracy of critical computer simulations.

Another big win was with the University of Tennessee for a system which will reach almost a petaflop level of performance. This system was awarded by the National Science Foundation as part of their High Performance Computing Initiative. It will be used to advance science across a number of scientific disciplines, including global climate change research, natural disaster modeling, and understanding the complexity of the human brain. Without a doubt, these wins are clearly a tremendous start on the sales front for 2008.

On the product development and introduction front, though we have not yet recognized initial revenue on quad-core XT4 systems, we delivered initial quad-core systems in the first quarter and are starting system acceptances as we speak.

We also achieved acceptance of our first Cray XT5h vector system a couple months ahead of schedule. Clearly, execution on our product roadmap has been a priority, so we are pleased with these important milestones.

The next step, of course, will be to begin acceptances of quad-core systems, followed shortly by deliveries and acceptances of Cray XT5 MPP systems, which are due to begin shipping later this year.

Additionally, we announced yesterday a partnership with Intel that will bring together Cray's industry leadership in supercomputing systems with Intel's leadership in processing technologies. In a moment I will talk more about the opportunity we see here, but needless to say we are very excited.

Finally, we are planning to deliver our first petaflop supercomputer to Oak Ridge National Laboratory late this year. And that, combined with our other wins that I just mentioned, we now have sufficient visibility to achieve our 2008 growth objective. This is a great position to be in this early in the year. I know that Brian will mention a little more about this in our outlook. The timing of the Oak Ridge delivery has been targeted for late 2008 or early 2009, and over the course of the last three to six months we have made tremendous progress on the development front and firmed up a plan to achieve the Department of Energy's goal of installing this system this year. We and the folks at Oak Ridge are very excited about this system and we have a tremendous effort underway to see this happen, which, given the sheer size of this system, is no slam dunk.

Our current priorities are to continue to focus around product development and installations, winning new business, and leveraging our products and technology to expand Cray's role in the supercomputing marketplace.

I will talk more about this in a few moments, but I would like now to pass the call along to Brian, who will take you through our first quarter financial results in a bit more detail and outline our updated 2008 outlook.

Brian Henry

Thanks, Pete, and good afternoon, everyone. As Pete mentioned, although not representative in our first quarter results, we made great progress already this year both toward achieving our 2008 goals of growth and profitability and towards achieving our longer-term goals of market leadership and sustained profitability. I will talk more about our 2008 goals and our outlook shortly, but first let me take you through the first quarter financial results.

Revenue for the first quarter was $26.1 million. Revenue was impacted heavily by the availability of Quad-Core Opteron parts from AMD. We recognized no Quad-Core related revenue in the first quarter, though as we have discussed, we anticipate a substantial amount this year. We did recognize revenue on our first Cray XT5h hybrid system, formerly known as the BlackWidow project, in the first quarter, however.

Total product revenue for the quarter was $10.7 million, with strong service revenue of $15.4 million making up the remainder. Total gross margin improved significantly in the most recent quarter to 43.5%, compared to 33% in the prior-year quarter. Both product and service margin contributed to the improvement, with product margin improving to 40%, driven primarily by product mix, and service margin coming in at 45.9%, well above our target of 40%. This was driven by a one-time higher margin service project we completed in Q1. We do not expect this level of margins to continue in the near future.

Operating expenses increased in the first quarter to $22.8 million compared to $17.4 million in the first quarter of 2007. As we mentioned on the previous call, the BlackWidow development contract expired in 2007. Thus, net R&D is impacted in the near term as we work toward wrapping up the development and scaling of the XT5h system. Likewise, the nature of the DARPA contract, which presently accounts for the vast majority of our product development co-funding, is such that we have expected the percentage of co-funding to decline.

Our R&D expense outlook now reflects an increase associated with the investments in the support of our Intel partnership, a partnership that we obviously are very excited about. Sales and marketing, along with G&A, were relatively low for the quarter. Included in the first quarter 2007 results were non-cash items of $2.9 million for depreciation and amortization and $0.6 million related to stock compensation expense.

Net loss for the quarter was $10.6 million, or $0.33 per-share compared to a net loss of $800,000, or $0.03 a share in the prior year period.

With respect to the balance sheet, we used cash in the quarter as anticipated, ending the quarter with $147.3 million in cash and short-term investments, which compares to the unusually high-level at December 31 of $179.1 million, and is flat with the $147.6 million as of March 31, 2007, or a year ago.

Inventory increased modestly quarter over quarter to $58.3 million from $55.6 million at the end of Q4. Inventory at customer sites of $19.8 million at quarter end was relatively flat quarter over quarter. Receivables increased to a more typical level at $40.7 million compared to an unusually low level at year end of $23.6 million.

Clearly, though we had a nice result with respect to gross margin, overall Q1 results were not strong. Once again, we have made great progress toward achieving our full year goals, which I will talk more about now as I move into the outlook for the year.

For 2008, while there is a wide range of potential outcomes, we expect to be profitable for the year. We have a good visibility for the remainder of the year and expect to have significant revenue growth, now, to somewhat over $280 million. As previously indicated, revenues will be heavily weighted toward the second half of the year. Among other variables, this outlook depends heavily on the acceptance of the petaflop computer late in the year. Should the acceptance of this system not be completed by year-end, we would anticipate top line growth over 2007, but likely would not be profitable. We anticipate initial revenue from quad-core systems in the second quarter, and initial [ph] Cray XT5 MPP system revenue later in the year.

We expect gross margins to be similar to 2007 for the year, but will fluctuate significantly by quarter. Likewise, we anticipate higher operating expenses for the year, with the increase principally in the area of research and development. Our net research and development expense will likely increase by approximately 30% in 2008 compared to 2007. This increase is driven by the end of the significant funding agreement for the BlackWidow system and additional development costs associated with support of our Intel partnership.

Other operating expenses will increase with anticipated revenue growth due to commissions and other variable compensation. We anticipate cash balances to vary significantly over the remainder of the year as we build inventory for planned second half customer shipments. Our quarterly and annual results for 2008 will be affected by many factors, including the timing and success of planned product rollouts, availability of parts from suppliers, and the timing of customer acceptances, revenue recognition, and margin contribution.

So, as always, we must overcome certain challenges. We are very optimistic about our business prospects for 2008, excited about the future, including our Intel partnership, and continue to be focused on executing our plan.

With that, I will turn it back over to Pete, who will talk a bit more about the recent announcement and our priorities for the remainder 2008. Pete?

Peter Ungaro

Thanks, Brian. Our goals, which you have probably heard me state many times now, are to be the market leader at the high-end of HPC and to be consistently profitable every year. Over the past three years or so, we have made good progress in shoring up operations, improving execution across the company, and laying out a foundation from which to build toward our goals. We have not yet turned the corner in terms of our financial results, but have clearly improved on that front and have made tremendous strides in market and strategic positioning.

By leveraging our technology, brand, customers and key industry trends, the growth strategy we are working toward continues to be focused around three areas. First, to grow within the HPC marketplace. This is fundamentally the most straightforward growth path as we have a great brand and we have the right technology, particularly in light of the industry trend towards multi-core processing capabilities and the inherently increasing challenges with scaling.

With the second half introduction of the Cray XT5 MPP system alone, we will expand our addressable market by nearly 50% to over $2 billion dollars, and we are planning further expansion of our addressable market within HPC over the coming years.

With the announcement we made yesterday around collaborating with Intel to produce next generation supercomputers and technologies, we are further strengthening our ability to lead in the HPC market. Intel obviously brings a ton of silicon expertise to the table, and Cray brings world-leading supercomputer systems expertise. With the addition of Intel, and our continued partnership with AMD, we will be able to offer the best microprocessor technology the industry has to offer within the most scalable supercomputers in the world, at any point in time. Our collaboration with Intel is broad and comprehensive, covering engineering, go-to-market, and technology areas, and is much more than Cray simply adding another processor vendor to our adaptive supercomputers.

The core of this announcement is about Cray and Intel collaborating at the R&D level to dramatically advance future supercomputers by combining our expertise as we build out our next generation of systems, which we call Cascade. Needless to say, we are excited about this partnership and look forward to leveraging it to the benefit of our customers and business. We think it can fundamentally change the supercomputing landscape.

Our second growth area is around introducing complementary products and services. This is an area of natural fit and an area into which our customers are pulling us. Cray has always been a supplier of choice for the computer engine at the center of the supercomputing data center without much presence in those data centers outside of that. Customers want Cray to own more of the total solution that surrounds the computer engine, and would likewise like to leverage our substantial engineering talents to address some of their pain points that are not necessarily broadly applicable. The net is that we have a significant opportunity to broaden our solution set to the same customers we have been working with for many years, as well as new customers.

Our third focus area for growth is to exploit or leverage adjacent market opportunities. This effort is really around leveraging all that is fundamental Cray, but in ways that are not straightforward and part of what we have traditionally referred to as high-end HPC. One concept that is in the later stages includes leveraging our brand in ways that may not be focused on our traditional customer or market offerings, but the requirements of which are very much in sync with what Cray is known for and which Cray is great at.

Another concept now in the later stages is to leverage our expertise and knowledge around large-scale systems and to markets and customers with unique needs that cannot be met with commodity systems or even the mainline supercomputers that we build. The bottom line with respect to this third leg of our growth strategy is that what Cray brings to the table is tremendously valuable, and goes beyond the traditional HPC space that we have competed in for many years. We are actively pursuing opportunities today across all three of these areas and look forward to providing updates as we progress across all three.

Strategically, we believe we are very well situated and have the fundamental building blocks in place to succeed. We are focused heavily on executing this strategy to bring to fruition the opportunity that is in front of us.

Finally, before I turn the call over to the operator for Q&A, I just want to reiterate one more time our current priorities. First is to focus around product development and customer acceptances. We have some challenging tasks ahead of us on this front particularly the build-out, delivery, and acceptance of the petaflop system. Second, win new business. We have a great jump on this in 2008, but it is always a key priority, given that we are working on opportunities from less than a year to more than two years out in time. It remains a critical area of focus as we look forward to the remainder of 2008 and into 2009. And third, leveraging our products and technologies to expand Cray's role in the supercomputing marketplace, in addition to the Intel partnership that we just talked about. We continue to be positioned well in the marketplace. We have a strong sales pipeline around the world. And we have an expectation to grow the business significantly and to be profitable in 2008.

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) Our first question comes from Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett – Northland Securities

Yes, thanks. I guess, first of all, Brian, on the product revenue number for the quarter, the $10.5 million or $10.6 million, whatever it was, was that primarily all XT5h revenue or was there some other stuff in there?

Brian Henry

It was a mixture of things. We had – it was not – there was one XT5 system, but there was a mixture of other things, including some peripherals.

Chad Bennett – Northland Securities

Okay. Was XT5h, though, the majority?

Brian Henry

No, not relative to the $10.7 million, but it was an important piece.

Chad Bennett – Northland Securities

Okay. Okay, and then I think the question of the call will be on the revenue guidance you gave, obviously, pretty remarkable year-over-year growth. I know it is kind of a longtime coming with the Quad-Core AMD issues. I guess how did we get to the 280 or roughly $280 million for this year? And you talked about visibility into that number. I don't know how to phrase it, but do we need to win material additional business to get to that $280 million? And I guess on the other side of the equation, how much of a swing factor is the Oak Ridge installation at the end of the year?

Peter Ungaro

Hey, Chad, this is Pete. The $280 million number, as we mentioned, we have very good visibility into that number. We really are not needing to book a tremendous amount of new business to go and achieve that number. Clearly, it consists of a big ramp up of the XT5 MPP systems, because the XT5 really we are very excited about its ability to address a broader market. And with the wins that we already had at places like Department of Defense as well as with the NSF at the University of Tennessee, we are very excited about that program and that ramp up. And it is clearly also going to be assisted by our XT5h vector systems, which we used to call – formerly called BlackWidow, just to be clear, as well as some other – the quad-core XT4 machines. Clearly, the petaflop system at Oak Ridge is a very significant transaction for us, and that’s why we are specifically calling that out in the outlook. But as Brian said, even without that system, we are likely to have – we will have growth year-over-year versus 2007, just not as significant as we are stating here.

Chad Bennett – Northland Securities

Okay. And on – assuming the $280 million is a good number, which it seems like it is pretty good with high visibility, considering we will have a full year of XT5h, which is probably a decent margin product, why wouldn't gross margins year-over-year be flat? Is it just because it would be offset by some pretty large orders that might be lower gross margins?

Peter Ungaro

It is a balance of orders. So, clearly, the XT5h is going to be a little bit higher margin, as we talked about in the past. The very large orders like the petaflop system and the DoD wins are a little bit lower margin. So it all balances out. Clearly, one of the big focuses that we will have this year is continuing to work aggressively within the supply chain and with our customers to work on improving those margins as we go forward. But with a huge growth year, we feel comfortable with the margin guidance that we are giving.

Chad Bennett – Northland Securities

Okay. And then just last question I'll get out of line – get back in line. The AMD – it sounds like the AMD B3 version of Barcelona and maybe the Budapest chip also, it sounds like those issues have been resolved in large part. Can you speak to – I know you said you expect to recognize revenue on quad-core systems in the second quarter. What is the risk now with quad-core systems out there, not only at customer sites, but also systems shipped two to three months from now? Is it just kind of software test at customer site? What type of risks do we have left?

Peter Ungaro

Yes. So, we just started shipping those systems in the first quarter, as we mentioned, Chad. We are just starting the acceptance test. Clearly, there's a lot of work around software and scaling up the systems to the levels of – the sizes of the machines that we have out there. Of course, as you know, with us we are shipping very large machines out to the market. So these aren't simple servers, but pretty large supercomputers. So there is some work to go there still. We do expect to get revenue of quad-core in the second quarter and have that start coming in, but there is some risk that could potentially slide out, although our plan is, as we stated, to begin that in the second quarter and continue that through the remainder of the year.

Chad Bennett – Northland Securities

I guess just to sum it up, are you comfortable with the silicon quality and quantity that you are getting right now?

Peter Ungaro

Right now we have – we are on track with AMD from their commitments to us around both of those aspects.

Chad Bennett – Northland Securities

Okay, thanks. Thanks, guys. Good quarter – or good guidance, too. Thanks.

Operator

Next question comes from Doug Reid with Thomas Weisel Partners. Please go ahead.

Doug Reid – Thomas Weisel Partners

Thank you. First question is on just the variability around gross margin. Understand that timing is going to matter quite a bit here. But in terms of magnitude, can you quantify or add a little bit of color just what would you lay out as a bleak scenario versus a favorable scenario in terms of just how low or even potentially negative gross margin could go?

Brian Henry

Well, it’s important to appreciate that with a back-end loaded year we are going to have a lot more product revenue and service revenues, most likely. The ratio will go up. And typically, although not so obvious in this last quarter, product margins are lower than service margins. So one driver of margins being lower will be higher product revenues relative to service revenue. Then it really gets into specific acceptances and specific deals are often impacted by the level of, say, storage that’s involved or memory and things like that in addition to what the timing was of the deal and pricing, et cetera. So it’s a lot of variables. What I would say is, as Pete said, likely the period where we are recognizing the petaflops machine, the army deals, are likely to be lower product gross margin quarters than a quarter where we have a higher percentage of, say, XT5h deals, which tend to be a little higher because they are proprietary processors. Hard to say if I was saying which quarter is which. Clearly, fourth quarter is likely to be lower margins because that’s when we expect a good chunk of the XT5 quad-core systems to be accepted in huge volume. And potentially Q3 is a bit better, but again it depends on what else is recognized that period because there might be more of the XT5h, the hybrid formerly BlackWidow system.

Doug Reid – Thomas Weisel Partners

Okay that’s helpful. Thanks. Next question on Oak Ridge. You mentioned you have a plan now to achieve delivery by end of the year, but I am wondering if you could add a little color to what the risk factors are there in order of significance. What could go wrong and bump that into ‘09?

Peter Ungaro

Hi, Doug, this is Pete. So, I will start and I am sure Brian will add a couple of risk factors to mine. The biggest thing that we have to do is – it’s – the XT5, just to kind of recap the XT5, it’s going to be a new cabinet that we are doing. It is moving from one AMD processor type to another, specifically from Budapest to Barcelona. And then a lot of software work to handle the capabilities of shared memory node, or an SMP node. So those are kind of the major factors in development that we are working towards that we have the team really focused on. The other two aspects of it is – really around two things. One is the just sheer scale of that machine. It is obviously going to be one of the largest supercomputers in the world and the sheer scale and software work that it takes to do that are – is a lot. And then it's getting through all of our acceptance tests before the end of the year. I mean so I think those two factors I would add to it. Just to be clear with the cabinet work that I talked about, the new cabinet, it is a new liquid cooled cabinet. So it is a new cabinet – it’s not just bending sheet metal differently; it’s a new cabinet that allows us to be much more energy efficient, part of our initiatives around green computing at Cray. And we are – it really allows customers to have, I think, a very effective total cost of ownership on our machines, which is another compelling reason why we think the XT5 is so exciting in the market today.

Doug Reid – Thomas Weisel Partners

Last one from me, just on the competitive environment, any changes there, anything in the last quarter do you think worth noting?

Peter Ungaro

That’s a great question. I really must say that I think there really hasn't been much changes from my last update on the competitive front. There hasn’t been any major new announcements of systems, and I think the biggest change on the competitive front is increasing our partnership not only with AMD, but adding Intel to that. And so I think it’s kind of more with us than with our competitors this quarter.

Doug Reid – Thomas Weisel Partners

Okay, great. Thanks guys.

Peter Ungaro

Thanks, Doug.

Brian Henry

Thank you, Doug.

Operator

Our next question comes from Sid Parakh with McAdams Wright Ragen. Please go ahead.

Sid Parakh – McAdams Wright Ragen

Hey good afternoon, guys. Can you talk a little bit more about cash flow or where you see cash flow at the end of the year and maybe what kind of cash position you will end the year with?

Brian Henry

Sure. Cash at the end of the year is going to be heavily dependent on what kind of systems and things we are building for the following year. So it is a variable that will change. It also will be affected by the timing of when we get acceptances and payments on a large amount of systems that we ship out in Q3 and Q4. Right now, it can be a wide range of numbers. We didn’t say in the press release that we anticipated it going really up or down from this level at year-end but it could go either direction; I'll just make that clear. And it could be by significant amounts just because of timing of things. But fundamentally, when we have a year that we expect to be profitable, we should be in good shape over time on cash. So we feel good about that. Now, quarter to quarter, we are buying lots of inventory at unprecedented levels for Cray that begins to come into the factory in the second quarter and the third quarter, and begins to be shipped out largely in the third quarter and the fourth quarter, and we hope acceptances in the third and fourth quarter. These are things that could result in cash in one of the midyear quarters, second or third quarter, being lower than we anticipate at year-end just because of the huge timing of the build up of a petaflops machine, the DoD machines that we call – well, DoD machines. So those things in particular could have a big impact in terms of cash in any one quarter.

Sid Parakh – McAdams Wright Ragen

Okay. So, now maybe it’s a little too early to talk about 2009, but the guidance you have given for 2008 is certainly above, I think, our Street expectations. How should we think about ‘09 shaping up? Does the $280 million imply that some revenues have been pulled in from ‘09? How should we think about that?

Peter Ungaro

Sid, hey, this is Pete. So, it’s of course too early for 2009, but let me give you little bit of color. I mean clearly the petaflops machine that we have been working on over the last three to six months of getting that delivery into this year, is something that we have pulled in from 2009. But on the other hand, I would say we have had nice market reaction to our XT5 systems and its capabilities and competitiveness in the market, as well as I talked about three kind of areas of strategic work initiatives that we have had going on that we think can have a material impact into ‘09. So while it is too early to call, I think that we have a lot of good momentum going forward right now.

Sid Parakh – McAdams Wright Ragen

Okay. And then can you also comment on the pipeline where you see – I mean, what’s changed there, if at all, and how you see it shaping up your 2009 results?

Peter Ungaro

Yes. So, we had a great bookings quarter obviously this quarter. The pipeline continues to be robust across all geographies. We have brought on a new sales leader in Asia-Pacific. Of course, bringing on Ian Miller to lead our sales and marketing efforts overall at the company are going to have I think a real significant impact to our sales execution going forward. We are seeing a robust pipeline across all geographies right now. We, of course, have a lot of work to do to go and work through those opportunities and bring those home. But right now we are definitely – feel good about the opportunities that are in front us for 2009. We just have a lot – there's a lot of time to go before we get to closing those and getting a better feel for how they are going to play out for the year.

Sid Parakh – McAdams Wright Ragen

So, could you maybe give us a sense of the pipeline today as compared to, say, just the last quarter?

Peter Ungaro

We don't give specific numbers on the pipeline.

Sid Parakh – McAdams Wright Ragen

Sure, just directionally.

Peter Ungaro

Yes, directionally, I would say it’s about consistent. So, we did close a few opportunities; a couple of new ones came into the pipeline. But I would say it’s roughly similar to where it was in the end of the last quarter.

Sid Parakh – McAdams Wright Ragen

Okay. And then final question, you talked about expanding the available market for your products. Can you maybe get into some more detail? I mean are you targeting the corporate market or what are you talking about there?

Peter Ungaro

Yes, so, specifically, we have this kind of three pieces of our strategy. Specifically, we have been growing in the HPC market. We feel that the competitiveness of our products going forward, specifically the XT5, or most specifically I should say the XT5 system, we believe that we are going to be able to continue to grow within our current customer sets and over time start to reach out into new customer sets, especially systems that are smaller than we have typically done. So today a lot of our systems are in the $5 million to $10 million or even larger kind of price range. We think that the XT5 is going to allow us to have a competitive product in lower price bands, which will increase our addressable market. And we feel really good about the competitiveness of that machine.

Sid Parakh – McAdams Wright Ragen

Okay. Sounds good. Thanks.

Peter Ungaro

Thanks, Sid.

Operator

Our next question comes from Vic Kumar [ph] with Soundpost Partners. Please go ahead.

Vic Kumar – Soundpost Partners

Hi guys. Could you give us some more color on the potential change in expenses year-over-year for sales and marketing and G&A? I understand they will be up with the revenue, but I assume they are not going to grow as significantly as your revenue is going to grow this year. So I just wanted to get some more color around that.

Brian Henry

A portion of sales and marketing goes up with revenue because it’s kind of commitment based. The other G&A and sales and marketing costs are more hit by what I'll refer to as the incentive systems that we have in place. Last year, for example, was a pretty poor year and none of the executives got bonuses. Many of the employees got a fraction of their targeted bonus. If we achieve certain profitability levels, then bonuses will be paid out and they will have an impact of comparing year-to-year on operating expenses. They will have an impact of increasing those levels. And so why we say dependent on revenue – but it is also, depending on our kind of operating profit, sales and marketing, and G&A will increase over the year. Of course, if we have a poor year in profit, somehow, then we wouldn’t anticipate much of a change in G&A or sales and marketing.

Vic Kumar – Soundpost Partners

But would you expect – would you expect your revenue growth pretty significant year-over-year? Will there be a similar percentage increase across sales and marketing and G&A, or will there be some leverage?

Brian Henry

There's clearly leverage there. So there would not be that percentage of increase. They will just – they will go up from where they were on even the first quarter run rate, which was poor, or last year, if we are significantly profitable this year.

Vic Kumar – Soundpost Partners

Okay. But you wouldn't anticipate it growing as much as your revenue, that's all I was getting at.

Brian Henry

No, between them they may go up $3 million, plus or minus $1 million, something like that, maybe a little bit more. It all depends on the profit level we achieve.

Vic Kumar – Soundpost Partners

Well, is that figure across both of them or for each of them, $3 million?

Brian Henry

No, that’s combining them.

Vic Kumar – Soundpost Partners

Okay, got it. Perfect. And that was my only question. Thanks.

Operator

Thank you. (Operator instructions) Gentlemen, at this time I am showing no additional questions in the queue. I would like to turn the call back over to management for any concluding remarks they may have.

Peter Ungaro

Thank you. Just to reiterate, our key focus areas to support growth and profitability objectives in 2008 are to execute against our product development and customer acceptance plans, to close new business around the world, and to leverage our products and technologies to expand Cray's role in the supercomputing marketplace. Our long-term goals remain unchanged – innovating to achieve supercomputing market leadership and sustained profitability.

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

Brian Henry

Thanks, everyone.

Operator

Ladies and gentlemen, this does conclude the Cray reports first quarter 2008 financial results conference call. ACT would like to thank you for your participation, and you may now disconnect.

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Source: Cray Inc. Q1 2008 Earnings Call Transcript
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