Cray Inc., Q1 2010 Earnings Call Transcript

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Cray Inc. (NASDAQ:CRAY) Q1 2010 Earnings Call May 4, 2010 4:30 PM ET


Paul Hiemstra - Director of Treasury and IR

Peter Ungaro - President and CEO

Brian Henry - EVP and CFO


Chad Bennett - Northland Securities

Glenn Hanus - Needham & Company

Sid Parakh - McAdams Wright Ragen


Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Cray reports first quarter 2010 financial results conference call. (Operator Instructions) This conference is being recorded today, May 4th, 2010.

I would now like to turn the conference over to our host, Paul Hiemstra, Director of Treasury and Investor Relations. Please go ahead, sir.

Paul Hiemstra

Thank you. Good afternoon. I would like to thank everyone 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 Mike Piraino, Vice President and General Counsel.

This call is being broadcast live on the Internet and recorded for replay purposes. The replay will be available shortly after the call. You can access the replay by dialing 1-800-406-7325. International callers can dial 1-303-590-3030. You must then enter the access code 429-3223. A replay will also be available in the Investor Relations section of the Cray website for 180 days at

I would like to remind each of you that today's conference call will contain forward-looking statements that are based on our current expectations. Forward-looking statements include statements about our financial guidance and expected future operating results, our product development and new product introduction plans, and our ability to expand and penetrate our addressable market, and other statements that are not historical facts. These statements are only predictions and actual results may materially vary from those projected. Please refer to the information provided on this call and Cray's documents filed with the SEC from time-to-time concerning factors that could affect the company and these forward-looking statements.

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

Peter Ungaro

Thank you, Paul. And thank you all for joining the call today. I would like to begin with some comments around our first quarter performance and progress on our key focus areas for the year. Brian will then discuss our financial results and outlook. Then, I will wrap up by discussing our priorities going forward and open up the call for Q&A.

Clearly, we had a fairly slow quarter from a financial results perspective, which was in line with our overall expectations going into the year. That said, we had an excellent quarter in terms of securing new businesses. And most importantly, we remain well-positioned to achieve our growth targets for the year.

Our strong quarter of wins, which has continued into the second quarter, came from both domestic and international customers. In the first quarter, we signed significant contracts to deliver next-generation Baker Systems to domestic customers, including Los Alamos and Sandia National Laboratories, the U.S. Air Force Research Laboratory, the Arctic Region Supercomputing Center, and the U.S. Army Engineer Research and Development Center.

On the international front we had key wins at the Institute for Statistical Mathematics in Japan, and the University of Duisburg-Essen in Germany, where we will deliver an XT6m system.

Our most recent win was with the National Institute for Space Research in Brazil, where we will deliver an XT6 system, which will be one of the largest in the world for weather forecasting and climate change studies. Another new XT mini customer also in the weather and climate field, and that is the National Center for Atmospheric Research, right here in Boulder, Colorado.

In addition, we are in the final stages of negotiating two other large contracts where we have recently been selected as a sole vendor. Combined these contracts are valued at over $90 million, and would have product deliveries starting this year through 2013, along with multiple years of service.

These wins not only serve as a strong validation of our current technology, but also of our strategic roadmap and vision for the future of supercomputing. Our current and future generation architectures continue to lead the industry in terms of scalability and performance.

We continue to partner with some of the world's leading supercomputer centers to bring our key technical advances in our next generation of systems. Our strategic initiatives are pushing forward as well. During the quarter, we signed multiple contracts within customer engineering totaling over $20 million, including the contract with Microsoft that we signed at the beginning of the quarter and discussed on our last call.

With growth in custom engineering and a strong base of recurring maintenance, we are well on our way to building nice services practice within the company. Altogether, with our recent run of new contract wins around the world, I am happy to say that we now have nearly all of the orders necessary to achieve our revenue outlook for the year.

During the first quarter, we also took another step forward in expanding our addressable market and filling out our product lineup. In March, we announced our latest addition to the CX family with the launch of the Cray CX1000 supercomputer. This system with a starting price of under $100,000 and scaling up from there is right between our current CX1 and our XT mini supercomputers. This gives us the ability for the first time to offer a supercomputing solution at every level of the high-performance computing market.

With a choice of three unique compute blades, all featuring Intel's latest Xeon processors, the Cray CX1000 allows customers to architect a hybrid supercomputing system designed to deliver scale-out, scale-up or accelerated computing solutions. It is a perfect step in our adapted supercomputing vision and an excellent addition to the CX family. We are rapidly getting our sales channel partners up to speed with the details of this highly capable and flexible system.

Shortly after the end of the quarter, we also announced the latest version of our Cray Linux Environment designed to enhance the production operating system for our XT line of supercomputers. With the ability to scale to more than 500,000 processing cores, this third generation of system software also includes the introduction of something we call Cluster Compatibility Mode, which allows our XT supercomputers to run a broad set of applications from independent software vendors without modification.

This is an exciting enhancement that we have anticipated releasing for some time, as it eliminates a central issue supercomputing centers wrestle with during the buying process, deciding between a highly scalable system, like our Cray XT line versus a more traditional commodity cluster that runs ISV applications. Now, we have expanded the market for our XT systems by being able to do both.

In addition to Cluster Compatibility Mode, our latest Cray Linux Environment software includes features that further improve the performance, reliability and functionality of our XT supercomputers. Our future development efforts have also been going strong and our team passed a key milestone on our DARPA R&D program in the first quarter.

Essential for us hitting our goals in 2010 is the development of our next generation system known as Baker. So, I would like to give you an update on this important program. As we discussed, Baker is a combination of three major development programs, the compute blades, our next-generation interconnect chipset, and the supporting software stack.

The compute blade for Baker is the same blade that is currently part of our XT6 supercomputers, which began shipping at the end of March a few weeks ahead of schedule. Our recent win in Brazil featured an XT6 system.

Development for our next-generation interconnect chipset, internally known as Gemini, is currently on track for release in the third quarter. We have the latest version of the chip in-house and we are going through our internal testing to validate the design and determine its performance capabilities. We continue to work through the normal process of identifying and resolving issues.

This important development in testing is expected to continue for the next couple of months, while we currently believe that we will be able to ship on schedule, I want to be clear that we have a ways to go before we can be certain of hitting our delivery plans. I should also note that issues often aren't uncovered until late in the testing phase for these types of projects.

It is entirely possible that we will uncover an issue that, despite our best efforts to resolve it, could ultimately impact the delivery schedule and have a substantial impact on our ability to achieve our outlook for 2010.

Finally, we are also making progress on our new system software for Baker. We began to internally scale this software across a small number of cabinets. We are pushing each of these development efforts forward in parallel with the goal-to-ship the completed Baker system early in the third quarter.

As I said, we are not out of the woods yet, but I am extremely proud of the tremendous effort our team is putting in to attempt to bring this leadership system to market on-time. It is very exciting to see, but not for the faint of heart.

With that, let me pass the call over to Brian, and I will come back and discuss our plan for the rest of the year.

Brian Henry

Thanks, Pete, and good afternoon everyone. As Pete mentioned, and as expected, we got off to a slow start in the first quarter from a revenue perspective, but had a very strong quarter in terms of securing new business, and remain positioned to deliver on our growth targets for the year.

Before I get to the outlook, let me take you through the first quarter financial results. Revenue for the first quarter was $28.4 million compared to $74.5 million in the first quarter of 2009. Total product revenue for the quarter was $9.1 million, and service revenue for the quarter was $19.3 million. For the first quarter, we reported a net loss of $11.6 million, or $0.34 a share.

Total gross profit declined slightly during the first quarter from 24% in the prior year to 23%. For the quarter, product margin was 12% and service margin was 29%. Product margin was negatively impacted by low volume and a $500,000 write-down for excess inventory. Service margins were impacted by lower revenue recognized on one custom engineering contract.

Operating expenses for the first quarter were $18.2 million compared to $21.4 million in the prior year period. As Pete mentioned and as we anticipated, we passed a milestone on our DARPA contract during the first quarter, which drove reported R&D down by $12.5 million compared to the fourth quarter of 2009, where we did not complete a milestone.

For the first quarter depreciation and amortization was $2.2 million and non-cash stock compensation expense was $1.2 million. We finished the quarter with a strong cash position, with cash balances at the end of the quarter of $103 million.

Inventory increased in the first quarter from $29 million at the end of December to $40 million at the end of March and was driven by new procurements for future deliverables.

I would now like to take a moment to discuss our outlook.

A wide range of results remains possible for 2010. Many variables may impact our actual results, but one significant item is the timing of availability and customer acceptances of our Baker system, including its new Gemini interconnect chipset and associated system software.

Assuming a successful release of Baker early in the third quarter, and customer acceptances in 2010 as planned, we continue to anticipate revenue in the range of $305 million to $325 million for 2010. As a result of the timing of the Baker's system release, we expect a significant majority of our 2010 revenue to be recognized in the fourth quarter.

To assist in estimating revenue in the coming quarters, we currently expect revenue in the second and third quarters to be around $30 million and $50 million, respectively. Service revenue in 2010 is expected to be in the range of $110 million, driven by strong growth in custom engineering.

Overall gross margin for 2010 is expected to be in the mid-30% range. Changes in mix, commodity costs, foreign currency exchange rates, and contract adjustments, among other things, could impact the results.

Operating expenses are expected to be lower in 2010 than in 2009, driven primarily by lower outside research and development service expenses for the year, and anticipated higher R&D milestone credits.

Based on this outlook we expect to be profitable in 2010. Just to note, we have two more potential DARPA contract milestones for $12 million each that could be completed in 2010. We expect to pass these milestones in the third quarter and the fourth quarter, but as typical, that schedule could move a quarter or so either direction.

Other income and expenses are expected to be in the neutral range in 2010, with the income taxes for the year are expected to be about $1 million. The level of income taxes for the year depends on the geographic distribution of taxable income, and assumes that the valuation allowance related to U.S. tax loss carry forwards is not released.

Share count, when profitable, should be over 35 million, but is dependent on a number of factors, including our share price. We expect to use cash in 2010, with the majority of the claim coming in the third quarter, as we build inventory for product deliveries in the second half of the year.

In summary, I am very pleased with the progress we have made in development and our success with contract wins during the quarter. We continue to execute on our strategic plans with our new initiatives providing additional growth opportunities for 2010 and beyond. Assuming the development and testing of the new Baker system over the next few months goes well and acceptances occur when anticipated, we are set up for a very strong year in 2010.

So, before I turn it back to Pete, I want to bring to your attention that we put out an 8-K this afternoon. This updates the status of our very fine VP and Corporate Controller and Chief Accounting Officer, Ken Roselli. Ken expressed to us his personal strong need to relocate and work outside the Seattle area in the future. The timing for him leaving Cray is not yet mutually determined, however, we commenced to search for his replacement.

The 8-K indicates that we entered an agreement with Ken yesterday, which provides for the likely future transition to a future Corporate Controller. Ken is with us as usual on the conference call. I want to thank him for his terrific contribution to Cray over the last four years. He has been a major factor in improving our business and financial management at Cray. Few have his expertise in accounting combined with his business acumen. Thank you very much, Ken. We look forward to working with Ken through this transition and wish him the best in pursuing his new endeavors.

With that, I would like to turn it back over to Pete.

Peter Ungaro

Thanks, Brian. And let me also add in my thanks to Ken. Without a doubt, we remain firmly focused on executing in 2010 to deliver on both growth and profitability. And clearly execution in the second quarter is absolutely key to delivering on these goals for the year. We have a clear strategy to navigate through this important quarter and I would like to lay it out for you here.

First, executing on our product development and delivery plans for Baker. Baker development needs to continue on plan, and we must make timely progress on the last two areas within that program that I discussed earlier. With our XT6 now completed and shipping ahead of schedule, we are able to shift our focus to our Baker supercomputer release and the groundbreaking systems we are building for our customers.

As I mentioned, our goal is to release Baker early in the third quarter. This is a major effort that I would compare it to an all hands on deck drill inside the company and with our partners assisting on the project.

The production ramp we are anticipating for the second half of the year is as big and as technically involved, as we have ever experienced and it requires a companywide concerted effort to successfully deliver on that plan.

Hitting these delivery targets is essential to achieving our goals for the year. As many of you who follow us know, in order for us to get revenue on a particular system we must deliver it, install it, and pass an acceptance test. The acceptance test typically tests the performance, functionality and reliability of our supercomputers.

Acceptances typically take from one to three months to complete, even on a mature system and for a new system like Baker, it often takes a little more time to get through, making early delivery of Baker an important event to making our year.

Second, we are focused on continuing to grow our strategic initiatives. Between our new product announcements this year, adding the CX1000 to our system lineup, and the continued growth in custom engineering, we expect our strategic initiatives to continue to become more important to our business overtime.

We are also expecting continued growth from our third strategic initiative, the XT mini supercomputer. With the same scalable design and scale architecture included in our XT line, this system is driving new wins for us across different geographies and industries, including higher education, weather and climate, life sciences, and government research. This momentum should only get better with our new Cluster Compatibility Mode feature.

The third major focus for us is to continue our market momentum and win new business. We are already working on opportunities for 2011 and beyond. And we need to continue our focus on building our business for the future across all of our product and service offerings. Continued execution during the second quarter in these three areas is vital and if we are able to deliver on each of them on schedule, we will be set up for a great year.

While we have a lot of work left to do in 2010, and undoubtedly, we'll need to overcome some significant challenges, I'm extremely pleased with the momentum of our core supercomputing business, our expanding strategic initiatives, and the new opportunities that are in front of us.

With a complete product lineup that now allows us to deliver a Cray solution to virtually any part of the $10 billion high-performance computing industry, we more than tripled our addressable market within the last 24 months.

With that, I would now like to turn the call over to the operator to begin the Q&A.

Question-and-Answer Session


(Operator Instructions). And our first question comes from the line of Chad Bennett with Northland Securities. Please go ahead.

Chad Bennett - Northland Securities

Hi, a couple of questions. First, Brian, on the customers deal in the quarter, I think, you said you recognized lower revenue on. First of all, can you quantify that? Second of all, what happened? Third of all, do we make up for that at some point here to still make our 110 for the year?

Brian Henry

Yes. So, it did impact our revenue. It had to do with the way we account for it on a percentage completion contract. It was about a $1 million impact, and it relates to a view that the anticipated costs would be higher and moved out some of the revenue in time. The impact is probably permanent. But going forward, the margin, as we complete that contract, and the revenue should be more typical of what has been in the past.

Peter Ungaro

And Chad, as we have said in our outlook, we still project to hit the $110 million service number.

Chad Bennett - Northland Securities

So, the $20 million in bookings helps replace whatever we lost, I guess. Is that what you're saying?

Brian Henry

It is an accounting thing and so we had impact of what we expected to recognize in revenue against the cost in the first quarter of about $1 million. It really won't affect the revenue that we had anticipated for the year.

Chad Bennett - Northland Securities

Okay. Is there any change in your outlook for the margins on the service side of the business?

Brian Henry

I would say not at this time.

Chad Bennett - Northland Securities

Okay. So, we still think we can do 40% plus kind of margins there?

Brian Henry

We think overall services would be in that range, as we look at it today.

Chad Bennett - Northland Securities

Got it. And then, I guess, Pete, you reiterated your outlook or release date for interconnects chip and talked about potentially shipping in early Q3, couple of more months of testing. I guess, can you give us a sense for where you are testing wise in that chip? And I know there are things, trust me, I know there are things that come from it at the end of it sometimes that can surprise you, but just what we have left and how confident we are?

Peter Ungaro

So, we updated a little bit from last quarter. Last quarter, we mentioned that we were planning on third quarter for deliveries of Baker to the marketplace. Right now, we are targeting early in the third quarter, so that was a little bit of an update there. We have got the latest version of the chip back from our fab partner, which is TSMC, who is fabbing it for us and we are really going through kind of internal testing right now to validate the design, determine its performance. We typically at this point in time, identify issues and then work to find resolutions to the issues as we go through all the different testing process.

We have just gotten the chip back, so we're a little ways away from getting all through the testing process, which does take about two and half months or so. So, we do expect still a couple of our more months of serious testing before we get ready to release the chip to the marketplace.

Just going through this process, we can find things late in the process, or at any time in the process that we may not be able to find a resolution for and we just want to make sure that we remind everybody of that. But right now, as you can tell by our outlook and our best view of this, that currently we expect to be shipping early in the third quarter.

Chad Bennett - Northland Securities

Okay. So, I am just wondering, so you talked about on the call with that you guys have a great bookings year-to-date. And the majority of the year, well, your guidance from a booking standpoint is done, I guess, but you still have a $20 million range on the top-line. And I know it is acceptance probably, kind of driven that ranges. But do you have the bookings to, if acceptances all goes to plan to hit the high-end of that range or any further color there?

Brian Henry

We are not going to give color on that. We said, we were close to our range, right? And then we said we had a couple of other opportunities late stage at which some amount of those opportunities we anticipate to ship in 2010. But really the range is a function of acceptances largely. But we still have work to do otherwise we would have said something different in terms of achieving the top end of the range.

Chad Bennett - Northland Securities

Last question, obviously, you emphasized fourth quarter majority of revenue. So, I guess just by simple math you guys have to have a $200 million fourth quarter to hit the higher end of your range, or maybe even the midpoint. Is that even feasible from a shipment standpoint and logistical standpoint?

Peter Ungaro

Chad that is a great point and that is the right number. And it would be a huge quarter for us, no doubt. But we have mapped it out. We believe that it is feasible. It is really, again, going to be dependent on us achieving all the customer acceptances that we need to achieve in order to get to that kind of number, but it is definitely a feasible quarter for us.

Chad Bennett - Northland Securities

Okay, alright. Thank you.


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

Glenn Hanus - Needham & Company

How about on the software, the system software side, could you talk about that in terms of where you are and what testing remains, and the relative risk compared to the chip?

Peter Ungaro

That is a great question also Glenn. So, the system software, we have developed and still has little bit more development to go, but the majority of that is developed. We are really right now scaling it up and testing it across multiple racks. So, as I mentioned, we have started to test that on multiple cabinets now. It is still a small number of cabinets. Over the next couple of months we'll continue to grow what we call scaling tests for that software overall.

We don't consider that as big of a risk as the interconnect chip, because the interconnect chipset really becomes a binary thing. It is good and it can ship and it can meet our customer's needs, or it can't. And we have to go through a process where we would re-spin the chip, which would take a few months, and then bring a new version of that chip to market. The software is a little bit more flexible. We could continue, if we do find issues, we could continue to enhance that on a virtually daily basis and get through the process.

So, I would put it at a much lower risk overall. But of course, it is kind of the last thing on the development schedule at the end of the day to bring the system altogether. So, we can always, again, find things that could delay us slightly a few weeks or not, depending on where the software is. But so far so good on the system software front.

Glenn Hanus - Needham & Company

Okay. Maybe shifting gears a little bit to some of the new product areas. Last quarter, you talked about having the channel partners in place and it was more a job now of ramping up the channel partners on some of the lower end products. Could you comment on Dell and comment on ramping the channel partners and how you are progressing with the CX1000, CX1 and the iWS?

Peter Ungaro

Yeah, another good question, Glenn. On the channel partners it is kind of across the Board. I would say that we've had a slower ramp on them then we were hoping for. We continue to work with the channel partners, including Dell on the iWS, we might, just to be clear for everybody, we have a CX1, iWS, which is sold solely through Dell. And our other CX1 and CX1000 products go through the rest of our channel partners.

It is really a function of our team connecting with them. As I mentioned on the last call, we really feel like we have enough channel partners right now. It is really just getting the product in the channel, getting the education done and starting to build a pipeline and such. We continue to see, we have good hopes there, but a little slower than what we were hoping for right now on the channel side.

Glenn Hanus - Needham & Company

On the custom engineering side, you sound a little more positive there on the momentum of contracts. Can you maybe just elaborate a little bit more on the opportunities you are seeing and the prospects for additional meaningful wins this year?

Peter Ungaro

Yes, I was really pleased in the first quarter with custom engineering signing a number of contracts that totaled over $20 million between them. The nice thing is that it was across multiple customers and multiple segments. I mentioned the Microsoft win was a big part of that, as well as some other contracts.

The thing, I would say in custom engineering that I feel really good about is, we have three practices within custom engineering. We have our special purpose devices. We have our knowledge management and our data management practices. I am starting to see nice traction across each of those practices individually. So, each of them look like they're growing at a good clip level, and that each of them have separately a good opportunity pipeline in front of them. So, I'm feeling very good about some of the progress that we are making there.

Glenn Hanus - Needham & Company

And lastly, I know it is way early to start speculating about this, but assuming everything goes well this year and you are able to execute on your acceptances, can you comment on the prospects for growth in 2011?

Peter Ungaro

Well, we are trying to get through 2010 first, Glenn.

Glenn Hanus - Needham & Company

We are a tough crowd.

Peter Ungaro

But I would say for 2011, we have started to get some opportunities that are starting to push us out into that direction. As I mentioned on my statement on the earnings, on the call earlier, we have two opportunities that should deliver different product deliveries between 2010, through 2013 even. So, we feel like we're pretty well positioned overall. We've got a lot of work to do though and most of our bookings right now are sitting in 2010 recognizable revenue, and that is our target right now.

But hopefully, over the next few months, we will start to get a little bit more opportunity flow that would drive a 2010 bookings and backlog.

Excuse me, 2011 bookings and backlog.

Glenn Hanus - Needham & Company

The demand and funding environment still remains pretty positive around the globe?

Peter Ungaro

Yes, I would say on the demand side, you know, we have had an incredible run of wins over the past few quarters. I don't see as many likely opportunities even for wins in the second half, although, we do feel that the market is growing nicely. In fact, IDC said that the high-end of the HPC marketplace, where our primary focus is with our XT product line, is growing faster than the other parts of the HPC market, which is really great for us.

But I think it will be hard to follow-up, I think, the bookings that we have had over the past few, couple of quarters going forward. But I still feel that there will be a good amount of opportunities out there for us. And competitively I feel really good. We are winning against our major competitor, IBM, as well as other competitors. As we talked about last time we were on the call, IBM announced a next generation of product called POWER7 in the HPC market and we have been continuing to win. So, I feel pretty good about where we are positioned right now with our XT6, and then follow-on Baker product.


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

Sid Parakh - McAdams Wright Ragen

A question here on the timeline for Gemini again. So, if you do end up finding some issues say late, probably as late or early in your third quarter, right before your plan to deliver systems, how much time does it take to go back to get the re-spin done and have new chips with you guys?

Peter Ungaro

Yes, it is tricky because then we get into exactly where is the fix, and how does that need to be implemented, and what part of the ASIC and things like that. But in general, I would say, we typically would see about a quarter movement.

Sid Parakh - McAdams Wright Ragen

A quarter movement. So, given that you just got the chip from TSMC at this point, is there an anticipated timeframe that you send it back to them to correct any issues, or is it basically if this chip works, it works, if it doesn't, then you are a quarter out?

Peter Ungaro

Yes, pretty much. I would say that is pretty much the way that I would put it.

Brian Henry

It is the latter. However, it is important to appreciate that you have a designer of chip and there is lots of logic and things in that and the parameters and tools. So often, we'll find something that at initial test didn't work the way we thought it would when we did the design. And then, our team and often a combination of hardware and software guys go in diagnose, probe, figure out solutions and then evaluate the solutions. Often, they don't have any impact or material impact and work around. It is when we go through that process that we find something that we can't find an effective workaround in one manner or the other, then we have to assess its impact on our customers, and whether or not we need to re-spin it for that fact.

So, we always will find something that doesn't work exactly the way it was designed, or thought it would work. Most of the time you work through and you find effective solutions for it. If somehow we find one that we can't, that leads to re-spin. Now, we have done a re-spin before right, so we are now more mature in going through those processes. What we haven't done is really had the opportunity to scale it in a big machine and sometimes when you scale it, you find things that you didn't find at lower scales.

Peter Ungaro

I think the other part to answer that question is that the earlier we find a problem and find a fix to it, if we have to do what we call a re-spin, the clock starts from there. So, it doesn't necessarily start from when testing would be completed. It's when you find the problem and fix it.

Brian Henry

One other thing, just to be clear, depending on the time we have, leadtimes with the manufacture to redo wafers and things like that, that can affect the timing of the fix as well.

Sid Parakh - McAdams Wright Ragen

Right. Okay. Fair enough. Now, you just touched on competition earlier. Can you help us better understand what is it really that is driving customers towards Cray versus IBM or some of your other competitors out there?

Peter Ungaro

Yes, I think, the biggest thing that we have been able to do with our systems is truly build a tightly integrated supercomputer that is reliable and has very high performance as the system gets larger and larger. And that has been really our claim to fame. And Baker just takes that to another level by having a new interconnect chip, this Gemini chip, it is going to help that piece and really further our differentiation of our platform overall.

As well as the Cray Linux Environment announcement that we made really adds in a lot of new functionality and features that people have been asking for, not only on the high-end, but also some of our customers that we are going after with our mini product line, the XT mini. So, I feel it is really that focus that we have had on building specific technology innovation for the high-end customer, and then trying to flow that down the market as far as we can.

Sid Parakh - McAdams Wright Ragen

Okay. Fair enough. And then, can you also address customer concentration within the custom engineering business? Now, the $20 million in new orders that you just cited earlier were, you said across multiple customers. Is it fair to say there is probably one customer in there that is already up to a large portion of that?

Peter Ungaro

Our custom engineering business, we started when we launched it, as we told you guys, we were starting to focus on intelligence community within the governments around the world. I will say that those $20 million of contracts are across three different customers. And they are very different customers, so from government to Microsoft. So, we are starting to get, I think, a broader base of customers, but it is different by each practice. So, for instance in our data management practice it is very, we have a very broad customer base, without much concentration at all.

Within knowledge management that is probably somewhere in the middle. Then within our special purpose devices that is probably the one that is most concentrated right now. But it is a little different by each of the three practices.

Sid Parakh - McAdams Wright Ragen

And can you also remind us what you expect for custom engineering revenues in this current year?

Brian Henry

We didn't breakout the elements of it. We said service is about $110 million. Custom engineering piece of is in that in significance, but also our maintenance services, analyst services and other things that we do. I think you could guess the range by thinking about maintenance services historically.

Sid Parakh - McAdams Wright Ragen

Okay. And final question for me. Can you update us on what you're seeing so far in terms of business or new orders from the stimulus efforts worldwide?

Peter Ungaro

So, we have announced a couple of wins from the stimulus efforts around the world. We are still working on one other opportunity that is stimulus related that we will see how that one plays out here. So that has been a nice little addition to our business overall. I don't see too much more of that in the near future. I am not aware of really much other from the stimulus packages, but that can always change pretty quickly depending on the country and what they're doing.


(Operator Instructions) And I show no further questions at this time, I would like to turn the call back to management for closing comments.

Peter Ungaro

Thank you. As we discussed, we are focused on three key areas for the second quarter and the remainder of the year, continued success in winning and securing new contracts, executing on our product development, delivery and customer acceptances and driving growth in our new strategic initiatives.

2010 is shaping up to be a very exciting year and with continued execution on these priorities, we are making good progress toward our strategic objectives of long-term growth, profitability and market leadership.

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


Ladies and gentlemen, that does conclude the Cray reports first quarter 2010 financial results conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325, or international participants may dial 303-590-3030 and enter the access code of 429-3223 followed by the pound. Thank you for your participation. You may now disconnect.

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