Silicon Graphics Inc. F4Q08 (Qtr End 6/27/08) Earnings Call Transcript

Silicon Graphics Inc. (SGIC)

F4Q08 Earnings Call

August 28, 2008 5:00 pm ET

Executives

Bo Ewald - Chief Executive Officer

Doug Britt - Senior Vice President of Sales

Kathy Lanterman - Chief Financial Officer

Julie Quattro - Director of Public Relations

Presentation

Operator

Good afternoon. My name T.K. and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and fiscal year 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Quattro, you may begin your conference, ma’am.

Julie Quattro

Good afternoon and thank you for participating in this call. With me today are Bo Ewald, our Chief Executive Officer; Doug Britt, our Senior Vice President of Sales and Marketing; 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 fourth quarter and full year fiscal 2008 which ended on June 27, 2008.

Before we begin, I would like to remind the matters we are about to discuss, other than historical financial data are forward-looking statements and are subjects to risks and uncertainties described in our earnings release, our Form 10-K for the year ended June 29, 2007 and subsequently filed reports on Form 10-Q.

The information provided on this call is as of June 27, 2008 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 for pro forma 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 related reconciliation.

This conference call is open to the public and is being webcast. An audio recording of the call will be archived until September 4, 2008 on our website. During this call, we will refer to a presentation that is posted at sgi.com/investorrelations. Please take a moment to open that file now. At the conclusion of our prepared remarks, we will entertain Q&A. With that introduction, I will turn the call over to Bo.

Bo Ewald

Great. Thanks Julie. And as Julie mentioned, this presentation is posted on sgi.com on our Investor Relations part so in real talk to it as we go along, and this is the second time we have done this, and our intent here is to make it a sort of easier for you to follow along of what we are doing with the Company and also to establish a baseline of where we have come from and where we are going. And so, that is the whole intent here.

As we talk today, we have four major topics to cover; Q4 and FY ’08 results, which Kathy will do. I will talk generally about where we are going with the Company strategy and directions. And at this time get a little bit more behind the strategy, some of the underpinnings of the strategy. And then Doug will give an update on sales and Kathy will give some thoughts somewhat the future looks like.

But as we all talk today, you will hear four themes from us. Number one of those is that we achieve our primary goal for fiscal year ‘08, and that was bookings growth. You will hear us probably say several times that in fact our bookings grew about 25% year-over-year. And secondly that our backlog more than doubled compared to the previous year. And that establishes a good baseline and foundation for us to be able to start looking now at growing the revenue in the Company as we enter FY ’09. You will also see that we believe that we have the right strategy and we have a world-class team to help us lead the Company forward and execute that strategy. And then fourthly, that we in fact do have a plan as part of that strategy to grow our business should be profitable force in our markets as we move forward.

You will see on the third chart back that there is the usual legal disclaimer, and I am going to skip reading that to you and we will go to the fourth chart, slide 4. And basically, you have seen these were the major objectives that we had as we started fiscal year ’08 and there were seven of them. And basically, they started with our primary objective for the year which was to grow bookings. And we were seeking to have double-digit bookings growth and in fact again achieved about a 25% bookings growth. Secondly, to revisit our strategy, we have done that. We will talk about it again this time, but that strategy has three major elements of compute, store, and visualize results.

As we going through the year, we have added or elaborated that strategy around hybrid computing, our industrial-strength Linux environment software that we are moving forward with, and then launch the Company back in the visualization market again. We also, thirdly, had a major objective to introduce and refresh our product line kind of across the board. And so in fact, we have done that starting about one year ago right now, one year ago this month. We shipped our first ICE product, and we will talk later about the great success we have had with that this year. And we have refreshed our Altix both the XE Cluster products, as well as the traditional shared memory Altix machines. Also have refreshed the storage products that we have in the software, that we have, and introduced our first re-entry into the visualization market with our Virtu VN200 product.

On the services business, our major objectives for the year were to slow the decline of our customer service, our maintenance business and then to start growing professional services. Barb Stinnett join this just in the last few weeks, and in fact the one thing to point due is that our customer service revenues in Q4 actually grew over Q3. So, now as we move forward there is going to be some lumpiness and bumps as we move forward, but that is a huge accomplishment after a several quarters, many, many, many quarters of continual declines. So we are very pleased with that and looking-forward now to the New Year, and on the organizational side you will remember that we talked about wanting to move to a more vertical organization in sales and marketing. We have done that. And also to create a software organization to be able to move forward and Irene Qualters has joined us to lead the software organization.

We have already talked about the objective around leadership supplementing a team. But in addition to Barb and Irene, Doug Britt joined us as you know. Shahin Kahn did the same, and Nancy Hanna has joined us to run HR. And they really supplement the great set of folks who already were here at the Company. Then on the IP side, we had an objective to develop strategy to monetize the intellectual property we have. I would say we have a pretty good strategy, but the other part of that trying to monetize it. We still have lots of work to do on that side.

So, those are the major objectives that we laid out for the Company a year ago. And again, as we walk through we will give you reports on how we did in more detail against those. However, if you flip to slide 5, we will start with the quick Q4 and FY ’08 highlights. And on Q4 again we did $96 million in rough numbers of bookings compared to about $54 million in the same quarter a year ago which is about an 80% increased year-over-year. So we are very, very pleased with that. And for the year, our bookings totaled $356 million compared about $286 million of the year before which is about a 25% growth rate which is in rough numbers 2.5 times the market growth per the IDC numbers.

And that, maybe most importantly of all these in setting us up for the New Year, left us with a backlog at about $147 million, up about 2.25 times from where we were a year ago, a 120% increase from where we were at the start of the year. So, really tremendous of accomplishments on those sides for the Company. If you look at slide 6, you would see what has been happening with the bookings over the last five years. And as you know, really almost all of the financial results in this Company been decreasing and if you end flip to slide 7, you would in fact to see that we believe that we have hit an inflection point on the bookings, and in fact there now starting to increase. And our objective is to continue that momentum that we got going in fiscal ’08 and carry that forward to the future.

And on the eight slide, you would see what are backlog has been at the end of quarters. And in fact, you would see that we again believe that we have hit an inflection point here, and our backlog now is again roughly 2.25 times what it was when we started one year ago right now. And maybe equally importantly behind the numbers and Doug will give you more examples but what is really important to us are what our customers are doing with our systems and our solutions and our services. And we will point to some of the huge problems that folks like NASA Ames are solving where they have order that system and ICE system with 20,000 cores in it, and 20 terabytes of memory; or the German weather forecasting service, DWD, where they have ordered several systems from us to run Oracle to manage the historic weather forecast in Germany.

But maybe interestingly or in a timely manner, you would also see in the Olympics that have just been completed. In fact we helped out in a couple of ways. One of those was that about a year ago the Chinese media or logical service, the weather forecasting service in China ordered SGI systems specifically to predict the weather in and around Beijing where the Olympics where held and we have very nice melt from them in the last few days and in fact the systems work great, the weather was great and for a variety of other reasons, the smuggle was down and things. So, we were very pleased with that.

And then secondly, if you go to our website, you would also see some work that we did with Speedo in working on the new swimsuits that were used in the Olympics, for many of the record beating events that were held and in fact as you look at that, you would see that we are not only involved in very big modeling activities but also in ones like this and this was very interesting. I will not go into all of the details but basically as the swimmer swims, there is turbulence generated by the swimmer from the water and it turned out that as part of this computational modeling, there was more turbulence around the swimmers thighs than people would have ever thought before and that showed up in models and in fact with the design of this new, using computational fluid dynamics technique with this new suit, Speedo was able to minimize the turbulence around the swimmers' bodies and therefore the swimmers were able to for all a variety of reasons were sure to be able to swim a little faster.

So, we are involve in little projects, big projects and some of the most important and most interesting things going on in the world. With that, we would then turn it over to Kathy to talk about the actual Q4 an FY '08 results.

Kathy Lanterman

Great, thanks Bo. So, I will get to talk maybe about a little bit more of the dry elements, the quarterly results before I pass it back over to Bo to talk about some more fun things, to bring it a little bit more home to some of the fine aspects of what we are doing. So, I will start on Slide 10 and just as a reminder, in FY '08, we evaluated our successes by monitoring a few things and some of the key goals that we are attracting to were our ability to sustain new order momentum and particularly looking for that out of our new clusters and storage products, ensuring that we could meet customers' expectations in terms of delivery and acceptance, really capturing that technological differentiation, the quality of our products and expertise of our people to quickly deliver and install the most complex systems.

Also to ensuring working capital to the predicable cash flow of orders that we accept and that is often masked as I talked about a lot by the timing of the way that we recognize revenue and also our ability to diversify our order momentum to a manageable mix of large deals and what we call run rate business which are really the smaller transaction, generally under $2 million in which we can often shift the product and invoice the customer within the same quarter as the order was received. So, when we step back and evaluate the fiscal year 2008 results, we were largely successful in achieving the above goals. Total bookings in both segs is 25% year-over-year and that growth was achieved across both large and smaller deals so like the mix that we saw where we capture that growth to full 2008.

And now, I will go through a couple of the highlights that are highlighted on slide 8 but we met our bookings objectives, our bookings growth objectives and we really did that with getting Q4 bookings of $96 million which was a 78% increase over the year ago period and also brought us in at the high end of the guidance range that I gave last quarter. For the full year, we had bookings of $356 million which is the 25% year-over-year increase, we had particularly strong adoption of our cluster compute offering which I will go into a little bit more later, our growth in bookings, it really was our primary objective in FY '08 and that is really going to fuel our business turnaround and so we are very pleased to have achieved that objective. We also had a rebound in our pro forma revenue in the forth quarter from a low in Q3 but we do still have a very large delta between our GAAP and our pro forma results which we will on some of the slides that follow.

We produced very strong product standard margins and gross margins result in Q4 and we came in very close to our full year plan from a margin standpoint and we also effectively manage our working capital, maintaining cash at $40 million as we exited the year. We flip to Slide 11, you will see a summary presentation of our GAAP and our non GAAP results and then I will get into a little bit more detail in some of the major line items there. But first just as a reminder, we defined bookings also referred to our orders as the authorized orders for SGI products and professional services accepted in the period and that are expected to shift in the next 12 months. Backlog is accumulative bookings for which the Company has not yet recognized revenue and in just one other note on bookings and backlogs.

Last quarter, I reported that we have made an internal change in our bookings policy in order to line our policy with the material forecast arising as well as with what we believe is really in the industry standard and does a note that for the full year, this policy change had no impact at all on our full year bookings or our backlog as we existed FY '08 compared to the last year so there was one little inter-quarter blat during the year that that affected that we talked about last quarter but for the full year, it had no impact on it our number comparisons at all. So, just really starting at the top and focusing on backlog, we ended the fourth quarter with the highest level of backlog that we have had in many years. As of June 27, 2008, our pro forma backlog was a $147 million and that was up from a $134 million at the end of March 2008 and $66 million at the end of June last year and that represent increases of 10% sequentially and a 122% year-over-year.

The larger deals, those that are over $5 million, they comprise about 50% of the end of quarter backlog and we do expect to achieve acceptance on several of these deals beginning in the first quarter although the full value of the contracts, well let me do reflected in our GAAP revenue over several years and I will talk a little bit more about the impact on our guidance projections of our expectations on some of those large deals.

Going down the table here bookings we have really have talked a lot about that just really pleased with the trends and you can see the trends both sequentially and year over year, a nice pattern for us. From a revenue standpoint, we achieved a $121 million in pro forma revenue for the year which was a nice rebound from the law that we saw in the third quarter and also delivering the results then on revenue within the guidance range that I have provided last quarter. It does continue to be challenging for us to predict the timing of the conversion of bookings and backlog to revenue but we were able to achieve acceptance on two large deals in the quarter, the Total deal in France that Doug will talked a little bit more about later and the large deal that we have talked about earlier in the year with the state of New Mexico and that is the one that won the number three spot in the top 500 list back in November.

And going down some margins now, on a pro forma basis, we delivered strong product standard margins in Q4 of 2008 with product margins increasing 3 percentage points compared to the prior quarter and 5 percentage points compared to the year ago period. The difference between product standard margin and product gross profit margin is other cost of goods sold and that includes the cost of a manufacturing organization along with the normal variance as we expect to see in the manufacturing process. Our product gross margins in the quarter increased 19 percentage points to 34.2% driven by the strong product margins as well as significant reductions in other cost of goods sold; and those reductions were achieved in spite of the increase in the revenue quarter-over-quarter. So we got the revenue out them. We are able to keep the cost down and we really continue to focus on cost management initiatives across both our direct costs, as well as the variable costs in manufacturing. The margins for a services business increased 4 percentage points relative to the prior quarter but decreased compared to the year ago period. And that is primarily driven by the year-over-year decreases in our customer support revenue and in a short-term we have relatively fixed cost base in our customer support business.

Overall, our pro forma gross margin for the quarter was 36.9% and at the strongest quarterly performance on gross margins that we have had for the year. Now I will run through the GAAP results for the fourth quarter and the full fiscal year and then go through a more comprehensive review of the pro forma numbers.

On a GAAP basis per Q4 2008 revenue was $93.9 million at the 31.4% gross margin. The operating expenses were $58.1 million yielding an operating loss of $28.6 million and a net loss of $35.2 million. For the full fiscal year, GAAP revenue was $354.1 million at a 29.2% gross margin. Operating expenses were $230.7 million with a net loss of $153.3 million. As of June 27, 2008, unrestricted cash, cash equivalents and marketable investment were $40 million about flat compared to the prior quarter and slightly better than our expectations for end of quarter cash. We were indrawn our revolver at yearend and the maximum amount drawn on the revolving during the quarter was $4 million for a period of a day.

As of June 27, 2008, our headcount was 1632 compared to 1652 as of March 28, 2008. As previously noted, the Company uses certain pro forma or non GAAP financial measures that are not calculated in the accordance with GAAP because management believes that this pro forma financial measures are useful to investors to facilitate period to period comparisons with SGI's performance. Our pro forma results of operation exclude the impact of fresh start accounting, deferral of revenue recognition pursuing to SOP 97-2, the non cash impact of acquisition of certain assets formally own by Linux Networks, restructuring charges and stock-based compensation expense.

A detail bridge was attached to our press release and can also be found on our website. And now I will going to provide you with the summary of the pro forma financial results for the fourth quarter and the full fiscal year. On a pro forma basis, as I said, the revenue for the fourth quarter was $121.5 million as compared to $80.9 million in the third quarter of fiscal 2008 and that was in line with our quarterly guidance. The primary driver for the increase in pro forma revenue between the fourth quarter and the third quarter was the completion of those two large orders that I talked about that were in beginning a quarter backlog.

For the full fiscal year, our pro forma revenue was $432.2 million as compared to $532.4 million in fiscal 2007. In spite of our strong bookings performance in fiscal 2008, the fact that our acceptance cycles are typically 6 to 12 months long resulted in very strong backlog growth but a short following revenue for the year. Our pro forma gross margin in the fourth quarter was 36.9% as compared to 26.9% in the third quarter and 35.2% in the year ago quarter.

As mentioned earlier, the product standard margin remains strong in the quarter 45.3% compared to 42.2% in the prior quarter and 40.7% in the year ago quarter. For the full fiscal year, pro forma gross margin was 34% compared to 38.8% in the prior year. This margin results were very close to our expectations for the full year as we had anticipated margin declines driven by the shift in the product mix that occurred in our business during the year.

Operating expenses on a pro forma basis in the fourth quarter were $53.2 million about flat the prior quarter. The effect of the cost reduction initiatives that we announced in early July will begin to take effect on both operating expenses and headcount starting in the first quarter of fiscal 2009. This result in a pro forma operating loss of $8.3 million in Q4 fiscal 2008 compared to a pro forma operating loss of $31 million in prior quarter. For the full fiscal year, operating expenses on a non GAAP basis were $212.7 million compared to $217.5 million for the prior year resulting in pro forma operating losses of $65.8 million and $10.8 million respectively.

Our adjusted EBITDA which was calculated based on pro forma operating income was negative $3.0 million in the fourth quarter compared with a negative $25.7 million in the third quarter so a significant improvement. For the full fiscal year, adjusted EBITDA was negative $43.4 million compared to a positive $14.6 million in the prior year. This change in year over year result is largely a reflection of the investments that we made this year to drive bookings and backlog growth that those growth indicators did not benefit our current year PN&L.

I will just flip now Slide12 which gives a little bit more detail into the bookings results by product line. So, booking at that Slide, we really already spoken about the high levels bookings momentum and you will hear later from Doug about some of the things that we did that really drove that growth but a few other things that I just like to highlight on this page looking at this by product line are that our core system is overall we create 25% but our core systems grew 35% compared to fiscal 2007 and that was driven by particularly strong adoption of our cluster products.

We only introduced our ICE product towards the end. We only start it shipping towards the end of our first quarter but you can see that from a booking standpoint, our cluster products also grew over 400% compared to the prior year so that is a growth driver for us in our business. Compared to the year ago quarter, our core system bookings actually grew 75% and then we also achieved the highest level of professional services bookings that we have had in recent history. So, that is another strong indicator for our business and we expect acceleration out of those initiatives with Barb Stinnett having joined the Company.

I will flip you quickly to the next slide, Slide 13 which gives you a little bit of the pro forma revenue results by product line and the one thing that we are happy about year-over-year, the comparisons are not particularly strong but compared to the prior quarter, we saw a nice rebound in our revenues. We received our strongest quarterly cluster product revenue to date so that is a strong indicator in the business and as both said, we also have strong customer support revenue performance and saw a quarter-over-quarter increase in customer support revenue for the first time in a very long time and that was really driven by strong contribution of our support solutions plus offering.

So, now I will just flip to next topic slide and before I turn it back to Bo, there is another item that I would like to mention. Today, we filed an 8-K outlining the terms of the 5^th Amendment to our credit facility. The key changes that we made in this amendment include that it provided us for approval for us to increase our indebtedness, really to give us greater options to fund the working capital requirements of some of our larger European deals. It also continues the existing waiver of total leverage and consolidated EBITDA covenants through the first quarter at fiscal 2010 and the reset those covenants with that point in time.

It provides for more formal and regular dialogue between management and the debt holder group, something that we do regularly, it just have to formalize through this most recent amendment to the arrangement. And as changed for these modifications, certain other covenants were added or modified and none of which we expect to affect our operations. In addition, the interest rates has been increased with the associated payments deferred until maturity and you will soon see a little bit more of the detail of that we have highlighted the summary of that in the 8-K and you can look to see all of the details of that agreement soon in one of our SEC filings.

With that, I will turn it back to Bo. I will be back to discuss guidance in a few minutes but in a moment, I will turn back to Bo to discuss the strategy a little bit more.

Bo Ewald

Great, thanks Kathy and today, we will step behind the strategy a little bit more and try to give you some insight into why it is working actually and so on Slide 15, is sort of what our foundation is and we have talked about versions of these before but we have great strengths and they kind of our bookmark here by the 4,000 customers we have who have been great customers very loyal to the Company, blue chip names in both government as well as industry and then our people in the brand that we have and kind of in between that are the strengths that we have in hardware engineering, software engineering, our ability to deploy systems that actually work and then again with people who know the space as well or better than anyone else.

If you go to Slide 16, you have seen this before and this is our three-year business roadmap and we have just completed the first year of that roadmap and you will remember that basically, what we have outlined is that to really get this Company going again, it is going to take order of magnitude three years and then in fiscal 2008, we are going to focus primarily on growing the bookings and if we were able to grow bookings with fiscal 2008 within our business that would then set us up to grow revenue in fiscal 2009 because as Kathy mentioned earlier, our revenue usually logs bookings by 6 to 12 months.

So, again fundamentally if we could grow bookings in the sectors and what the products that we outline here in 2008, we knew that we could start growing revenue in 2009 and we are now on the path to be able to do that. So, in 2009 you will see us continue to push to grow our continue our bookings but now you will see our revenues start to grow and then as we move to the longer term have the business which is really much more sustainable and we will again come back and talk a little bit about that as we go along.

But fundamentally, if you look at page 17, we believe that we are in midst of another big change in the computing landscape and we are fundamentally driving to become a dominant player again. This time sort of in the fusion of high performance computing, with more data intensive applications and kind of a new wave of visualization that is coming along and we will talk a little bit about that and get behind those. Our objective here is to grow faster than the market and we gain or retake market share and achieve a business model that is comparable to the competitors that we have in the industry and do that again within this roughly three years that we have outlined.

So, if you go to the next chart Slide 18, we will talk just a little bit about those three different segments really, some of them, you do not even think of them as high performance computing but they have a lot of the same characteristics that we have seen. We see them sort of colliding our fusing I guess. It is the way to say it. So, in the high performance computing or HPC market, market is projected by IDC to continue to grow about 10% a year, we see from our customers ever increasing requirements whether it be to design new swimsuit or how to get potato chips in a can better or better diaper absorbency or global climate modeling for the next 100 years all across all the applications we see ever growing requirements from our customers.

The reality is though as the hardware part of this business is become more commoditized, there are increasing pressure on the hardware margins. That is a fact of life for us and we acknowledge that. On the day to driven applications, we believe that big data driven applications are growing even faster than high performance computing. When we start attacking those or try to help customers solve some of those problems we in fact see that we have solutions that are better than competitors do. Some of our competitors are limited frankly by their system architectures and we will point out some of that in just a second and people who are solving big data problems need to analyze typically very quickly if you are trying to detect fraud, you better be able to detect very quickly and then be able to do something about it and in many cases, try to get insight into it which brings us to visualization and where all this moving toward much more image driven interconnected visual world and some of that comes from high performance computing but a lot of it is being driven by the new media that is out on the web, you all look at videos today over the web and your children are probably a generation ahead of you in terms of how they use the web and the type of information that is available on the web and what they do with it and similarly for gaming.

So, in those visual worlds, the models there are again becoming huge. They are interconnected, people want to collaborate one way or another and much more complexity which again sounds a lot like sort of traditional high performance computing with big compute, lots of data and needing to be able to look at it and do something about it. So, the slide on number 19 tries to show in a visual way sort of what is happening and what we are trying to do and the head is building from our HPC foundation, be able to help solve some of these big new visualization problems as well as the big data management problems and I will not read all of those to you but we feel we are in a very strong position to do that.

The technology strategy that we have again is a sort of encapsulated on the chart on page 20 where our objective is to have best of breed compute visualization and storage products, be able to put those together in unique ways with our hybrid systems and then surround those with our industrial strength Linux environment that we are building and we have again good success in many of those areas in the last year. So, then on Slide 21, you would see that technology strategy sort of forming the base and we can then take that technology strategy and play with more emphasis on one part of it or another in high performance computing, image driven and data driven applications. That is what we are trying to illustrate on the slide 21.

So, let me first then talk about the high performance computing part and the sort of story behind the strategy if you will. So, if you go to Slide 23, at the quarter of what we do on high performance computing, we have really world class hardware platforms and when you get behind all of the technology parts of it, we have two really big differentiators or things that focus in this Company can do as well or better than anybody else in the world and those are really around system architecture, designing high performance balance, meaning balance between the CPU, the ability to do IO and memory, shared memory and scaleable systems and then secondly our ability to package those systems.

Then we have another set of core competencies in software around Linux and our industrial strength Linux environment software that we are developing again aimed at scalability and a performance orientation and it is our people who enables us to have this really poor technologies. Now, jumping to each of those just a little bit.

The slide on chart 24 tries to depict what one of the big advantages we have with our Altix shared memory systems. We do not name vendor A and B there but they are pretty big companies by comparison to us and what this chart shows is how much shared single system image memory we can have on a system compared to the other folks. Clusters in, this chart show it in terabytes. We can have up to 128 terabytes of shared single system image memory on our platforms. What that means is compared to this other two larger vendors who can have two or four terabytes, ours you can put problems that are 25 to 50 times bigger into the shared memory of our systems and be able to operate on those problems much more quickly than if you have to go off to disc every time.

So, that is a huge differentiator for us and part of why you are seeing us be able to tackle the very large problems and provide performance with our traditional systems. The next chart gets at sort of the packaging that we can do. On Slide 25, this is a picture of what a typical cluster looks like and what you would see are a bazillion cables coming off of at the back of it connecting the processors, connecting the IO on these machines and connecting to the outside networks and if you then flip to the next slide, you would see what the back twain of one of our much larger ICE machines look like and in fact you would see on that system, we have reduced the number of cables compare to a typical cluster by about 80%.

This leads to much better reliability since interconnect is typically the number two failure mode of clusters and to much better scalability. So, again this is core engineering work this Company can do and has done and this is part of why we see the ICE machine doing so well. The next chart also is an evidence of our ability to put a lot of electronics in small volume but also pay attention to the energy consumption. So, if you see the dotted line on that chart, that shows for various loads on ICE or an Altix system shows the power efficiency and you will see we are running between 88% and about 91% efficiently and in fact there is a big new initiative within the industry called climate savers and in fact our ICE and Altix machines today are still efficient that we are meeting the criteria that had been sent out by climate savers for 2009 and 2010 for a fully loaded system.

So, our customers are able to solve big problems with more reliable, scalable systems and in fact do it at a very high energy efficiency which is very important to them. Then if you look a Slide 28 as we put those systems together then for the customer, one of the things that we are now probably have 30 to 40 customers have done in the course of the last year are to buy some of our shared memory or SMP systems that is shown in the left side of this chart and some of our clustered systems, XEs or…sorry, Altix on the left and ICE or XEs on the right and be able to use those systems in conjunction with the start of our industrial strength Linux environment and be able to share storage between them.

Again, we are up to 30 or 40 customers who have done applications like that and we see that just growing as we move forward. Then let me shift and talk a little bit about the sort of some of the underpinnings of complicated thing that oriented around the data driven technology so again as shown on Slide 30, the key differentiators we have in the space are some hardware and some software. On the hardware side it comes back to those big shared memory systems again so I will not show you that same chart that we had on slide 24 but that chart is directly applicable here because what it means is that our customers who have large databases are able to put more data in memory and operate on it using standard oracle for example compared to the competition.

They can in fact put 25 to 50 times more data in memory than they can with the competition and then they are operating on it at memory speeds not at disc speeds. So, much, much faster than you would see from others and that is what is enabling us and Doug will talk about some examples there where we are starting really to break into this arena, we are seeing it not only on the sort of the traditional markets and particularly classified markets but also now starting out with some internet companies and that sort of thing. So, great progress there and it is a fundamental architectural difference that this Company has compared to others.

And then secondly, another key differentiator for us is the software or key enabler really is the software and the core of that is our data migration facility and we will also our CXFS file system plays a key role in this as well and what that software enables us to do is to tackle really big amounts of data, manage it and archive it and we talk previously about the national basketball association application, if you flip to slide 31, you would see an example of what DMF, our data migration facility software enables people to do and that is to be able to take all of their data and put it online and then we manage it between primary online storage, near line storage and our tape libraries which are typically offline but to the end user all of that data looks like, it is there. It is available and it may take a little longer for them to access it if it is on the tape library for example but them we will move it into active storage and then it will be there as they need it.

So, we manage all of that and we now have many customers who are up to multiple terabytes of information stored on our systems and those would include many of the big classified sites that we serve, climate modeling and I think the national basketball association with their content is up to 78 terabytes of information stored on our system. So, that is a great advantage for our customers and for us in this more data driven environment. Lastly and just briefly on image driven, well I am not going to say too much about this because you will see more when I get the card ahead of the horse here over the next six months, you will see a lot more here but the Company as shown on Slide 33 has a tremendous history in visualization and we are really pleased to be getting back into it and we just I am going to say this whether I can or not, we just did some previews for customers at the SIGGRAPH conference and we were really, they are helping us steer where we should go with our visualization software and we are really pleased with that interaction and you will see a lot of stuff coming from us soon particularly on the software side.

So, slide 33 shows some of the things that this Company pioneered and that we are going to build our new base and visualization upon starting with not only the work station business but we working with Nintendo had the first 64 games with them that came out, the first virtual reality centers started coming out 15 years ago or so. They are about 700 that goes in the world today. We have done lots of pioneering work in rendering and special effects and then again it is the people in this Company that enable things to happen. So, we are going to build on that tremendous foundation as we tackle today's visualization problems which are far different than those of 10 years ago or 25 years ago and there are three big challenges in visualization and that is that the problems have got so much bigger and they are complicated.

You have seen a press release from us in the last year about the two billion element model of the human heart as an example and people want to be able to look at anything anywhere in the world but there is too much stuff to look at, tremendous amount of stuff. So, sort of just quickly 10 years ago or more, people were creating models that had like thousands of polygons in them and then we have to translate those onto display that had a million pixels. So, there was a lot of work to do on the display side. In today's world, the models are hundreds of millions to billions of polygons or elements and we are now displaying those on 2 million or 4 million pixel displays or big displays but the problem has changed. It has gone from thousands of elements to billions of elements while on the display side; it has gone from a million pixels to maybe 10 million in the most complicated.

So, the visualization problem is really become a compute problem again and that is exactly what we are attacking and attacking it some hardware but more software as we go along. So, if you look at page 35, our objective here is to let people visualize anything and everything no matter how big it is, let them look at it anywhere and anyway they want from a PDA up to high definition television, reality center or in a movie theater and again we will talk to you over the next few months as we move forward so wrapping all three of those parts with our industrial strength Linux environment and we believe that again, we have the right technology strategy mapping it into these three parts of the market as HPC, image driven and data driven applications further fuse into what we believe is a larger market.

So, with that let me turn it over to Doug who runs sales and marketing and who joined us during fiscal '08 and he is going to talk a little bit about the wrap up from fiscal '08 and then what we are doing to continue that momentum in fiscal '09.

Doug Britt

Great. Thank you, Bo. Good afternoon everyone. If you turn to page number 38, what I would like to do is highlight some of the things that help us drive and achieve the bookings performance growth that both Kathy and Bo had mentioned and first let me thank the worldwide sales organization and all the supporting functions for terrific effort on that 25% year-over-year growth in bookings, a lot of hard wok and we definitely appreciate it from the executive staff. What we did initially is we wanted to organize ourselves around protecting and growing our core customer base, clearly if we are going to have growth strategy and growth, we need to protect our existing customers.

So, what we did is we did that. We organized and we had dedicated people calling our most strategic customers to make sure that we protected our position there and we grew our position and we allowed them to have more time to sell deeper and wider into those companies. We also looked around the Company in terms of our coverage model and we have found that we needed to build more hunting teams that were dedicated to hunting new opportunities and our targeted market verticals to help grow and accelerate the growth. What we did there is we invested in geographic or geographies that were high productive geographies where we felt there was a good customer base, a good mix of our targeted industries as well as strong management that help drive the growth and we do some of our investment in certain geographies to help to fund that and we are very conscious to our overall sales OpEx to make sure that we were doing this growth in building this equal system in a way that is sustainable for the Company.

Additionally, what we did is we focused on market verticals. We define what market verticals were critical where we had strong solution offerings to those market verticals and we align our coverage model around the concept that were critical in those market verticals and then we wanted the initiative to really accelerate the growth through partners and we wanted to increase our coverage model through partners so what we did is we dedicated more investment to expanding our coverage of partnering with channel partners or resellers. We put more resources in it. We started working with them and proactively marketing certain bundles and certain types of products through them.

Additionally, what we have done is we deployed a country distributor model. A country distributor model is a way for us to cover a certain geographic territory utilizing a variable cost method so we introduced as an example SGI Korea which is a partner that we gave exclusive rights to represent us in SGI Korea and as you see us moving forward, you will see leveraging that model, it has been very successful for us in Japan, it has been successful for us in Korea and we want to leverage that model moving forward so we can still represent ourselves and expand but utilizing a variable cost to do so. And then we wanted to really adopt a proactive solution selling approach.

Leveraging our technology strengths, targeting them to a market vertical, bring the solution to a customer before that customer ask for that solution and before our competition offer that solution and we have many very good success stories of doing that this year. If we go to page number 39, these are the market verticals that we are focused in on; defense and strategic systems as a critical market vertical, here we actually took one of our senior sales executives, dedicated them to focus in on growing that vertical.

Digital media is an area Bo had mentioned. Digital media is both a market vertical but it is also a horizontal play across market verticals. We had talked about our archiving solution that we have with the MBA.

We are selling that solution across market verticals and we have wins and defense and intelligence and we have wins in other parts of high performance business and in production media. Energy is a focus for us, what we have done with energy is we are targeting a select group of customers. There is a lot of activity happening in seismic exploration. We have targeted certain customers because they want to increase productivity and we have got a very strong solution for them and we are doing that on a select basis. And then higher ad and research is an area that has always been strength for the Company, continues to be one. We grew it pretty significantly last year and we got a good coverage model, good product offering for that sector.

High performance business is a area that we invested in last year. We want to see it accelerate in fiscal year '09 really two entries and we will have more in fiscal year '09 but two entries that we are really holding ourselves accountable for driving, one is the active archive that we are selling through the market verticals and the other is what we are calling adoptive warehouse initiative for us and I will speak to that a little bit. Manufacturing is a critical market segment for us and really we are focused in the product development side of manufacturing where they are running certain types of applications that we have been able to differentiate ourselves to help those customers run and then national centers which are the large lab opportunities, we are strategically focused on a few strategic opportunities there that we think will be beneficial to our business moving forward.

If you go to the next page, what I really wanted to highlight is what are the real key drivers that are contributing or contributed last year to our bookings growth and I really identified for that help that 25% growth. First the entry into cluster products and certainly the high end blade server cluster solution that we have with our ICE machine. That was a significant driver in the bookings. In that, many of customers, a lot of them being dormant customers were interested in a cluster solution and prior to fiscal year '08, we just did not have that in our toolbox to sell. We also leverage a hybrid solution which I will talk about, Bo had mentioned our data migration facility software and certainly adopt the data warehouse solution which is a new initiative for us help to fuel our bookings growth last year.

Turning to next page, I would like to highlight some examples of some strategic wins and our characteristic of many wins that we have had with our solutions. The first one I am highlighting is Total and Total is a French seismic exploration company and Total was really focused on improving oil exploration specifically finding ways more accurately drill for oil and to better manage the productivity of their existing oil fields. Total already in this case had an existing IBM P-series cluster. They had a file system and storage but the customer was not happy and wanted to shorten the time to run complex seismic application software and improve the reliability to run this applications. There is nothing more frustrating for a customer when they are running a large application to be 48 or 72 hours into the application only to have that application timeout and have to reboot the system to run it. IR system went in parallel with the existing IBM system.

So, the customer could still utilize the existing hardware investment. We use our professional services organization to do that. We also replace their file system with a new file system that could scale to a larger data sets and we added three of our high performance storage systems. Essentially, the solution delivered significantly faster and more reliable performance while also accord to customer price performance benefit versus our competition. The ICE machine launch has definitely enabled us to compete in the high end blade server cluster market and applications for scaling up and it is a new market for us that we have accelerated a lot of bookings last year end.

If we go to the next page, Bo had mentioned hybrid system. I will spend a little bit of time explaining what that means. Hybrid solutions are really targeted to those customers who utilize a mix of complex software applications. This solution enables a customer to utilize the advantages of shared memory or distributed memory to maximize their optimal performance on the application that they are running. Essentially, certain applications achieved better performance on shared memory while others perform better on distributed memory environment. Our integrated solutions enables the customer the ability to utilize the benefits of both systems while also leveraging one file system or one storage environment.

In fiscal year '08, we had been extremely successful positioning the solution in the manufacturing product development environment. Many manufacturing companies use certain applications. One is called finite element analysis for structural strength, crash, worthiness and durability design. This application is better run on shared memory environment. They also run computational through dynamic applications for aerodynamics, engine combustion and heat transfer design. This application achieves optimal performance in a distributed memory environment. So, leveraging both systems enables the manufacturing company to get better performance and last year, we booked over 30 significant wins selling hybrid solutions for major manufacturing OEMs. Many of which had been dormant customers to SGI prior to entering into the cluster market and these customers are not easy customers to break into but yet, because of that capability we are able to do so.

The next page highlights win related to our data migration facility software. We have talked about and past earnings calls that we have a great relationship with the NBA and we really were driving a technology solution to help them develop and active archive that enable the NBA to archive terabytes of videos, stilt photographs, voice data that they use to distribute over the web to internal and external customers. Since our NBA win, we had focused on introducing this solution to a targeted list of customers. One of those customers was National Geographic. Very similar to the solution that we develop for the NBA, we deploy our data migration facilities software and our CXFS file system software, storage component and servers to create a centralized shared archived, digital media solution for the National Geographic.

DMF enabled National Geographic a virtualized multiple silos of stored within a solution that scales as fast and as far as their content. DMF provided about a 10 acts improvement in performance over their previous hierarchal storage management solution that they had. SGI server storage and software enable them to get a solution that tune for their needs but we utilize all standard shelf components with our software. Today, when you watched the National Geographic channel on television, its content has come through an SGI's system and National Geographic is now on the process of digitizing their print magazine content on one of our systems.

The next page highlights our adaptive data warehouse solution and the adoptive data warehouse solution is targeted to run data warehouse software and applications from the leading software providers, Oracle being one. The solution is based on industry standard components and you can see here on the chart, Intel, Linux, standard storage, internet switches, fiber channel switches and it achieves a high performance from utilizing SGI's shared memory interconnect and fast IO found on our Altix shared memory servers. This, combined with really tightly integrating and testing really helps to speed applications and enables us now to compete in data warehouse environment for opportunities.

We have had several wins that we recorded in the adaptive data warehouse initiative. One is a large internet company, I wish I could use their name but I cannot. This large internet company had historically deployed and still has a horizontally scaled clustered environment to really manage a lot of transactional data through their data warehouse infrastructure.

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