Silicon Graphics International Management Discusses Q2 2014 Results - Earnings Call Transcript

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Silicon Graphics International (NASDAQ:SGI) Q2 2014 Earnings Call January 29, 2014 5:00 PM ET

Executives

John Swenson

Jorge Luis Titinger - Chief Executive Officer, President and Director

Robert J. Nikl - Chief Financial Officer and Executive Vice President

Analysts

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Mark Kelleher - D.A. Davidson & Co., Research Division

Glenn Hanus - Needham & Company, LLC, Research Division

Tim Quinlisk

Operator

Good day, ladies and gentlemen, and welcome to the Silicon Graphics International Corp. Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. John Swenson. Sir, you may begin.

John Swenson

Thank you. Good afternoon, everyone. I'm John Swenson, Vice President of Investor Relations and Treasurer for SGI. Welcome to our second quarter fiscal 2014 conference call for the period ended December 27, 2013. Joining me on today's call are Jorge Titinger, SGI's CEO; and Bob Nikl, CFO.

Today's press release is available on the Investor Relations section of our website at investors.sgi.com. This call is being webcast, and a replay of the webcast will be available on our website 2 hours after the conclusion of the call and will remain available until the next earnings call.

Please note the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today's conference call includes forward-looking statements, including the general outlook for our business and for certain financial measures, growth expectations for certain products, and various operational and product development plans. There can be no assurance that we will achieve our financial objectives, and we ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these forward-looking statements. All statements made in this conference call are made only as of today's date. SGI undertakes no obligation to update the information in this conference call, whether as a result of new information, future events or otherwise. To obtain copies of our latest SEC filings, please visit sec.gov or our website.

Also during today's call, we will make reference to several non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release, which, again, is posted on our website.

Now to our conference call. Jorge will provide some highlights of the company's performance for the second quarter as well as an update on the business outlook. Bob will give further detail on the Q2 fiscal 2014 results and our outlook. We'll then take your questions.

With that, I'll turn the call over to Jorge Titinger, SGI's CEO. Jorge?

Jorge Luis Titinger

Thank you, John, and good afternoon to everybody. I will briefly review the final second quarter results, and then we'll provide some additional color on our strong momentum in SGI's core strategic businesses, current visibility in the federal intelligence space and the progress of other aspects of our strategic turnaround plan. Financial results for the second quarter were consistent with our prerelease on January 14, and reflected the impact in our Fed business from the October government shutdown and its after effects, as well as continued freezing of certain ongoing programs in the intelligence sector.

Our Federal revenue in the quarter was about $44 million, down more than 40% from the prior quarter, and down approximately 30% from the second quarter last year. Our quarterly revenue is always irregular because of the timing of deals. However, this is the lowest result in our Fed business in more than 3 years. With the shutdown behind us, we believe that Q2 represented our bottom for this segment and the business as a whole, and that we will grow back our Federal run rate revenue over the next few quarters.

I also want to emphasize that the rest of our core business, which reflects how we are doing in commercial markets and in the public sector outside the U.S., was up 13% sequentially, and it's expected to show at least 30% annual growth in the second half of the year. I'll have more to discuss on that side of the business after we cover what happened in the Federal sector during Q2.

As you may remember, the government reopened on October 16, under a 90-day budget resolution. After the restart, we saw several different behaviors from government customers. For some customers managing programs with multiyear funding authorization, particularly civilian agencies, funding flows restarted within a few weeks. However, most agencies have limited spending authority during the 90-day budget window that ended earlier this month. Our many funding decisions were simply put on hold, pending a longer-term budget resolution. This impacted volumes in Q2 and generally, has resulted in certain existing programs and new opportunities shifting out in time. With passage of a new 2-year budget and agency-level appropriations largely completed, we now are beginning to see more normalized funding authority and technical decisions related to future opportunities. However, in the case of certain intelligence-related programs, our activities are still effectively frozen. We are extremely proud to provide high performance compute and storage solutions for a variety of mission-critical government programs, including technology platforms that help to ensure the security of the United States and our allies. We believe that SGI will continue to be a trusted partner in these efforts. We will continue to work closely with current and prospective Federal customers and ecosystem partners to support the government's near-term and long-term IT-related missions, and we are confident that an overall government business will soon resume its growth trajectory, whether as a result of the reprogramming of currently frozen projects or new opportunities on behalf of civilian and defense related customers. Until current programs restart or are replaced with new opportunities where we will compete, we are targeting a low level of intelligence related revenue over the second half of this fiscal year.

These near-term disruptions and delays in the U.S. government business do not dampen our enthusiasm about the Federal revenue opportunity over the long term. A wide range of government agencies engaged in engineering, signals and image processing, weather forecasting and Big Data analytics are reliable early adopters and natural customers from the scale and speed of SGI's solutions. Today, we work with a number of branches and agencies within the Department of Defense, which is by far the largest single buyer of IT in the world.

In addition to our direct relationships in the intelligence sector, we also support programs with each of the 3 primary services of the military; the Army, Navy, and Air Force, as well as other accounts that we serve through major system integrators. We have a solid market position in intelligence, even though our current share of the DoD's total technical IT spend is small. It will leave substantial room for SGI to strategically grow in intelligence and DoD broadly, regardless of trends in overall government spending. We are pursuing a significant pipeline of big deals within DoD that we expect to be awarded in the next 6 to 12 months, and we believe we are well-positioned to resume our share gains in defense-related accounts.

We also have a growing position in civilian agencies, anchored by our majority share of the technical compute capacity in NASA Ames and our emerging relationship as the primary Big Data analytics platform for the U.S. Postal Service. Based on our significant experience in value-added technology in Hadoop, InfiniBand base clusters and shared memory computing, we are being invited to participate in new, high-level technical discussions and RFPs in civilian accounts and government-funded university research programs. The sales cycles to achieve meaningful volumes in some of these accounts can span many quarters, so we are not looking for immediate volume contributions from these efforts, while we do expect to achieve notable wins and revenue from new civilian customers over the next several quarters.

Now let me shift the discussion to our exciting initiatives and the recent traction outside the Federal space. As I mentioned earlier, based on our guidance, we expect non-Federal core revenue in the second half of the fiscal year to be up at least 30% from the comparable period last year. This reflects solid revenue growth in the products, horizontal solutions and vertical markets where we have been investing. The growth is most occurring in our UV product line, which is on pace to grow approximately 30% for the year, and in ICE X, which excluding the low-margin deals, were more than double compared with last year. The growth for UV is being driven this year by 2 initiatives. One is to aggressively target within our technical computing base key customer use cases and applications where the UV shared memory architecture significantly outperforms clusters. We have leveraged this into recent wins in Japan, at the Institute of Statistics and Mathematics, the Marine and Earth Sciences lab, and the Universities of Nagoya and Kyoto. In the commercial world, we have used the same approach to introduce UV into an elite manufacturer of private jet aircraft, a major U.S. aerospace company, and a major German automaker. Our other initiative is to reposition UV and its massive coherent shared memory as an engine for Big Data analytics, including realtime analysis, graph analytics and databases that require in-memory solutions.

Our work at PayPal and our growing presence in the Postal Service are great examples of UV's value in Big Data applications. In addition, over the first half of the fiscal year, we booked more than 70 orders for our small-configuration UV, which we believe is seeding the market for up to $20 million of incremental UV volume as we convert proof-of-concept buyers into more significant users.

As we look further ahead, we have goals for a much higher UV revenue, driven by an increased direct sales force and focus channel partnerships that we believe will now -- will allow us to realize the potential of UV in the enterprise.

We announced earlier this month that we have entered into a joint marketing and development agreement with SAP, which is a very significant milestone for this product line. Under this new relationship, we expect to jointly develop a high-performance Big Data appliance built around the UV shared memory architecture and the SAP HANA in-memory database. It will be positioned in the sweet spot at the high end of the HANA user base, with scalability that is not available on any other competitive platform. Based on our joint assumptions about the SAP HANA customer base and workloads, we believe that the total addressable market for the new UV HANA appliance is in the range of $50 million to $2 billion, including upgrade and service opportunities that will develop 2 to 3 years after general availability. We are planning to invest in the engineering development, evaluation units and go-to-market capabilities over the next several quarters. I'm currently expecting to see initial revenues in the second half of our fiscal 2015.

Our ICE X product line is also a growth driver in this fiscal year. Let me put this into context. We sold approximately 100 million of ICE product in fiscal year '13. But roughly 2/3 of that volume was from the low-margin deals or LNDs that we had previously discussed. Our goal for the current fiscal year has been to grow ICE X profitably. Adjusting out the LNDs from last year, in fiscal 2014, we will more than double our sales of ICE X, with margins in line with our business model. And despite the delay we're seeing in Fed, we expect the absolute level of ICE X volume this year to come close to FY '13 levels.

We expect to continue to grow pipeline and revenue in this product line, with the goal of competing for and winning more large ICE X deals going forward.

Our branded storage business is also set to roughly double this year. Branded storage includes our MIS family of primary storage solutions, our 'zero watt' make and the InfiniteStorage Gateway active archive solution, and storage software including our DMS, as well as the Trusted Edge and StorHouse solutions from our recent FileTek acquisition.

The compute-attached OEM storage solutions we resell will likely be down this year due to lower overall volumes of compute. However, we continue to be on a growth trajectory in the storage business and are continuing to invest in products and go-to-market capability.

Reflecting this investment, we now have established a dedicated storage overlay team responsible for enhancing our direct sales efforts and building the channel in every region.

As a final comment, I want to note the addition of Liz King to our new -- as our new Senior Vice President of Worldwide Sales. Liz has extensive experience developing and leading global teams to build and grow strategic account relationships and channel partners in both the enterprise and public sectors. This includes key leadership roles with responsibility exceeding $1 billion in sales on a global basis. She was most recently Vice President of Strategic Alliances for Juniper Networks. She also led the server group of Hitachi Data Systems and held key senior business development and sales roles at Alcatel-Lucent, Sun Microsystems, Raytheon and Texas Instruments. We are extremely pleased to have an individual with Liz's talent, background and energy to join our team.

That concludes my formal remarks. So let me turn it over to Bob Nikl for more on the Q2 results and outlook. Bob?

Robert J. Nikl

Thanks, Jorge, and good afternoon, everyone. Let me begin with our second quarter results. As a reminder, many of the financial measures that I will be discussing are on a non-GAAP basis unless otherwise indicated. A full reconciliation to our GAAP financial results is provided in our press release.

Second quarter revenue of $116 million was consistent with the preliminary financial results that we announced on January 14. As we previously discussed, the disruption in our Federal business has been significant. And while we are obviously disappointed with this result, our expectation is that this quarter represents a bottom for both our Federal business and total company revenue.

Core revenue, which we define as HPC, Big Data, storage and services, and which excludes revenue related to legacy cloud infrastructure as well as the low-margin deals in prior fiscal periods, was $107 million compared to $130 million in the prior quarter and $133 million in the same quarter a year ago. Core revenue in the Federal business, which includes U.S. government customers, system integrators and higher-education institutions, was $44 million, down from $76 million in the prior quarter and $65 million in the same quarter last year. As Jorge mentioned, this decline was due to the government shutdown as well as the freezing of certain intelligence-related programs.

Outside of the Federal business, which includes commercial accounts as well as the non-U.S. public sector, core revenue was $62 million in the quarter, up 13% from $55 million in the prior quarter, and down 8% from $68 million in the same quarter a year ago. We are expecting a very strong second half in this category due to the previously discussed large deal that we won in the U.K., as well as significant deals in Japan and Latin America. We therefore see the non-Fed business as essentially on track, with core revenues set to grow at least 30% in the second half and 10% to 15% for the full year.

Second quarter revenue related to the legacy cloud, which is generally commodity service for provision in cloud infrastructure, was $9 million, which compares with $16 million in the prior quarter and $38 million in the fiscal second quarter of 2013. We are continuing to exit commoditized legacy account relationships and expect essentially a 0 contribution from the legacy cloud category going forward. Products represented 67% of total revenue for the quarter, with the compute operating segment at 78% of total product revenue, while the storage segment was 22%, compared with an 82%-18% split in the prior quarter.

In our market sectors, the public sector, which includes both U.S. and foreign government, in addition to higher education and research, was approximately 49% of total revenue, while commercial is 51%. This compares with a 67%-33% split in the prior quarter.

Domestic revenue was 52% of total revenue, while international was 48%, and this compares with a 66%-34% split in Q1. Approximately 79% of revenue came from direct sales, while 21% was from system integrators and other channel partners, compared with an 85%-15% split in Q1.

During the quarter, we had 1 customer representing greater than 10% of total revenue. Our non-GAAP gross margin was 30.7%, up from 28.6% in the previous quarter, and up more than 2 points from a year ago. The sequential margin improvement was driven by a number of factors, including a higher mix of service versus product revenue. Service accounted for 33% of total company revenue in Q2 versus 26% in the prior quarter. Product margins also benefited from improved mix, with less legacy cloud and higher-margin core product revenue as well as higher factory absorption due to the inventory build in support of our expected higher second half revenues. Consequently, we would expect to see some sequential decline in our overall gross margin percentage as product mix increases, but we currently expect to see overall year-on-year gross margin improvement for FY '14 of 3 to 3.5 points.

Non-GAAP operating expenses in the quarter were $42 million, up approximately $1 million from the prior quarter, and consistent with our internal plan. The higher operating expenses reflected additional headcount from the acquisition of FileTek in our storage business, as well as annual salary increases that became effective at the beginning of the second quarter. We did implement a number of temporary measures to moderate expenses during this challenging quarter, which contributed approximately $1 million of savings compared with what would have been our new run rate.

With higher-second half revenues and enhanced investment in both UV and storage, we expect operating expenses to normalize in the near term between $43 million and $44 million per quarter. Consistent with our turnaround strategy, we are extremely focused on rationalizing both costs and expenses, and expect to end the fiscal year showing a year-over-year decline of approximately $8 million to $10 million in total operating expenses.

Our worldwide headcount at quarter end, including full time and temporary employees, was 1,325, essentially unchanged from the prior quarter.

Net loss for the second quarter on a GAAP basis was $0.40 per share, within the range detailed in our preliminary release. Non-GAAP net loss was $0.20 per share, and excludes approximately $7 million of non-GAAP adjustments as detailed in our press release.

Now some brief comments on the balance sheet. Ending cash was $118 million, down $47 million from last quarter. The change in cash for the quarter was consistent with our expectations based on increases in finished goods inventory to support the second half revenue plan, the acquisition of FileTek, capital investments including our new headquarters, and share repurchases.

Capital expenditures in Q2 were $5 million, and depreciation and amortization expense was also $5 million.

During the quarter, we repurchased approximately 360,000 shares of our common stock at a cost of $4.7 million, or an average of $13.19 per share.

In the past 12 months, we have repurchased approximately 760,000 shares at a total cost of $10.6 million. With the additional $15 million buyback authorization announced in November of last year, we have approximately $19 million of remaining authorization for the program through December 31 of this year.

In summary, we are on track with measurable improvements in both gross margin and operating expenses, that have been at the core of our short-term and long-term financial targets. The disruption in our Federal revenue has pushed out our target of the dollars per share in earnings, annualized earnings power, but we believe that we are now beginning to close that gap. In addition, we are reaffirming our guidance for revenue of $260 million to $300 million for the fiscal second half, as well as our longer-term targets for gross margins of 31% to 33%, and operating margins of 8% to 12%.

And with that, I'll turn the call over to the operator to open the line for your questions. Sam?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alex Kurtz of Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Jorge, just in your assumptions for the remainder of the year, are we to understand that there's basically no intelligence dollars in the second half? And anything that comes in from that vertical will be upside to the numbers?

Jorge Luis Titinger

Yes. There actually are some intelligence dollars, but not from the one agency that we discussed before. So for that, where we see essentially the programs frozen at the time, we don't have any numbers for the remainder of the year.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

When you think about that agency in fiscal '15, are you just sort of wiping that project from your pipeline? Or is the communication from that agency is that, that revenue could rematerialize later this calendar year?

Jorge Luis Titinger

Yes. We're actually seeing -- we believe that they will come back as a pretty vibrant customer for us. Specifically what projects or whatnot, that is still under discussion. Until there's clarity, we won't know exactly what projects. But we see this continuing to be a good business for us in the future, just not this -- beginning this fiscal year.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Yes. And when you talk about the Federal business coming back to a more stable run rate starting in the March quarter, are we talking about getting back to the 50 level -- the $50 million level, the $60 million level? How do you -- what do you see is sort of a stable run rate there?

Jorge Luis Titinger

I'm not sure -- well, you're talking on a quarterly basis?

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Yes.

Jorge Luis Titinger

We don't have those numbers. Yes, we, again, we don't have a lot of precision in this, but we anticipate that in that kind of timeframe, we should get back to where we were in our fiscal '13 timeframe.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Okay. And Bob, I sort of missed the commentary about product margin. What -- did you suggest the product margin will be down in the second half?

Robert J. Nikl

Yes. What I'd said in the prepared remarks was that the 30.7% non-GAAP gross margin in Q2 benefited from certain things like a higher mix of service revenue because of the lower top line. And we also had some very favorable factory absorption because of the lower revenues in the build for finished goods in the second half. We also internally modeled a little bit of what I would describe as an abundance of caution with regard to the Jabil transition, which is supposed to take place on February 17. In the near term, we would expect there could well be some redundant costs relative to current revenue levels, but we're currently trying to work that very closely.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

So just to be clear, I mean, exiting the legacy cloud business, moving to Jabil, your product margin should be moving into the low-20s. Is that a fair assumption after we get through this sort of absorption and transition period?

Robert J. Nikl

Yes, that's right. Just in the near term, Jabil won't be a positive influence, or it could potentially be somewhat incrementally negative.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

But just for 1 quarter or 2?

Robert J. Nikl

That's my expectation because, as I say, with the abundance of caution, the last thing you want to risk is fulfillment. So we start day 1 with a full complement of people, if you will. And that's what we'll have to manage as we go forward.

Operator

Our next question comes from Mark Kelleher of D.A. Davidson.

Mark Kelleher - D.A. Davidson & Co., Research Division

Just to be clear on the intelligence agency that's still frozen, that has -- is not related to the government shutdown. Is that correct? That's another issue?

Jorge Luis Titinger

That is correct.

Mark Kelleher - D.A. Davidson & Co., Research Division

And you believe that issue can be resolved in this -- over the next few quarters?

Jorge Luis Titinger

That's our belief. Right? There were some public discussions that have essentially reconfirmed the criticality of the work they're doing. There will be more restrictions on usage and whatnot, but I think in the next several quarters, there will be clarity as to what gets funded, whether projects are -- that were in line are reselected or the new projects started.

Robert J. Nikl

Yes, Mark. It's Bob. I guess one of the things that we're looking at right now, as you know, the panel made their recommendations to the President. Specific agreement or disagreement with those recommendations is still a work in progress at the moment. But we're somewhat cautiously optimistic that we're going to get some more clarity in that area over the next few months.

Mark Kelleher - D.A. Davidson & Co., Research Division

Okay. And taking a look at cash. Where do you think that goes over the near term? Does that continue to be a burn there for a couple of quarters?

Robert J. Nikl

Right now, what we're modeling is that Q3 would be the trough because we will still be building inventory and investing in working capital in Q3. And there still will be some CapEx investment going on. But as I say, I think right now, our expectation is that Q3 would be the bottom.

Operator

Our next question comes from Glenn Hanus of Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

So over the last couple of weeks since your preliminary results, what have you unearthed that's sort of really incremental in your -- whenever you're talking to the various customers. What's sort of most striking?

Jorge Luis Titinger

I think the -- so let me start backwards. So we haven't learned a lot more clarity on this one particular customer that we've been discussing. With the rest of the business, what we're getting is we're seeing growth in our core business outside of Fed. We're continuing to see that, so we actually experienced growth in the first half and we're still looking to grow not insignificantly in the second half. We announced this agreement with SAP for a joint development effort that will start kicking in the second half of '15. We think that is very meaningful for us, from a number of aspects. We are starting to see regional improvements in both Europe and Japan, and that's actually very positive. So it's not just Federal as a region, if you will, that was doing well. And so all of that, just as -- a good sense for -- we should start to see growth in the second half as we said, and then continue that into the following -- the course will follow that.

Glenn Hanus - Needham & Company, LLC, Research Division

And just to be clear with the range you've given of $260 million to $300 million, does both -- do both ends of the range exclude revenue from the key Federal customer? Or does the upper end of the range that start to include some return of revenue from that customer?

Jorge Luis Titinger

There's none -- no revenue from that customer in either number.

Robert J. Nikl

Yes. The biggest factor for the quarter would be just timing of large project revenue acceptance in the fourth quarter.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. In terms of the new appliance for SAP, what do you view is like the competitive landscape for that appliance?

Jorge Luis Titinger

So this is at the high end of the needs of customers using that. And so, at the moment, there's a sweet spot for certain configurations that can support databases larger than 2 terabytes and that can grow seamlessly. And that's the area whether you replace uniquely, right? We can go from this entry level configuration. A different direction for us will be kind of an entry-level UV and there's upside without having to do anything but add more to that UV configuration versus anybody else, where you would need more boxes. So I think we will see all the usual suspects, but that UV will have a unique advantage on being upgradable inside of the same machine. And that's very attractive for their role in SAP, but their customer base.

Operator

Our next question comes from Tim Quinlisk of Mayo Capital.

Tim Quinlisk

A couple of questions. The -- I just want to make sure I understood the ICE X trajection -- trajectory as you articulated. In fiscal '13, you said you did about $100 million, of which 2/3 was LNDs.

Jorge Luis Titinger

Right.

Tim Quinlisk

And you said that would double in '14, Jorge?

Jorge Luis Titinger

Yes.

Tim Quinlisk

So essentially running at about $100 million this year, does that include the $30 million for the U.K. deal that you guys announced last quarter? And if it does, is that part of the reason for the inventory build, or is that a different project that you were referring to?

Jorge Luis Titinger

So yes to both questions. So the growth in UV includes that win, and part of the inventory build is to fulfill that product -- sorry, that project.

Tim Quinlisk

Okay. So the $30 million from that U.K. ICE X project will be in the $100 million kind of run rate, roughly a number that you'll be doing for ICE X in fiscal '14?

Jorge Luis Titinger

Correct.

Tim Quinlisk

Okay. All right. And I just wanted to go back to this -- the whole Federal exposure that you have. You presented it where you've done about -- you did about $282 million of sort of core Federal revenues in fiscal '13. And of which, you highlighted about $180 million related specifically to more intelligence NSA kind of opportunities in fiscal '13. I'm just trying to get a sense of how those 2 pieces of business would look, assuming you do the $260 million to $300 million range that you've sort of given us for an outlook in the back half of the year. How does that shift, if you know what I mean? I'm trying to get a sense of the growth of one and the decline of the other, just so I can kind of quantify that.

Jorge Luis Titinger

Yes. So in the -- when you say the back half of the year, you mean, the fiscal year?

Tim Quinlisk

Yes. I just don't have enough data points to triangulate. I mean, I think you said that for fiscal '14, I think, it looks to be about $220 million of total in the core Federal. If I can kind of back the number out, in terms of--relative to the guidance you've given...

Robert J. Nikl

Yes, maybe I can help a little bit, Tim. It's Bob. So if you were looking at back half of the year only, Federal will be somewhere north of $100 million and very little of it will be ICE-related as regards to this specific customer.

Jorge Luis Titinger

Yes, so it's basically almost exclusively non-ICE-related for that customer.

Tim Quinlisk

Okay. All right. Okay. And then just one follow-up question on the cash. Bob, I know you alluded to the fact that you might be burning a little bit into the third quarter. Are you factoring in the closing of the Jabil transaction? And is that -- does that give you some relief from a sale of the asset point of view?

Robert J. Nikl

Yes. So we would expect to realize somewhere a little bit north of $6 million on the sale of the building, hopefully, on our third quarter. So that is factored into the projection. Again, it's mostly working capital and a current assessment of what we think we'll be spending on share repurchase.

Operator

Our next question comes from Alex Kurtz of Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Just a quick follow-up question, guys. With this Lenovo transaction, the assumption is out there that somehow, SGI should benefit in certain U.S. agencies where there's going to be a sensitivity to acquiring technology owned by a foreign company. It's actually an Asian, Chinese company. So even if the product may be serviced and manufactured or designed by people in the U.S., it certainly seems like that could be a risk to that business and an opportunity for domestic vendors like yourself. So any initial feedback on that front? And what that could be, as looking into 2015?

Jorge Luis Titinger

Yes. So I think, at a general level, we agree with that, right, that we think there's going to be opportunity in Federal for the reasons that you point out. There's essentially going to be opportunity also in Life Sciences, where -- just the fact that there's going to be a transition between IBM and Lenovo will open up opportunities. We haven't quantified the numbers yet. But we're seeing it in the same light as you are seeing it, Alex, which is there's going to be upside from that for us. And Life Sciences, as you know, is one of our key focus areas. So we have good efforts to be making there.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Jorge, will it be premature to say that customers -- in your dialogue with customers, they have highlighted this, or is it just an assumption that we're making at this point?

Jorge Luis Titinger

At this point, it's the latter. We have, actually, in the coming week, at meetings with the entire sales leadership, with Liz leading those efforts, and one of the key topics of discussion is how do we take advantage of an opportunity that's opening up, by this move from IBM.

Operator

And at this time, I'm not showing any further questions. I would like to turn the call back to Mr. Swenson for any closing comments.

John Swenson

Thank you. Thanks, everyone, for joining us. Note, we'll be presenting at 3 conferences in February and March. The Stifel, Nicolaus Tech Conference on February 11, the GMP Securities, and Morgan Stanley Conferences on March 3, all in San Francisco. This ends our call for today. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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