Thursday, May 6, 2010

SGI Treads Out Losses, Readies Altix UV

SGI (Silicon Graphics International) is the result of the combination of the old Silicon Graphics with Rackable. Neither company was known for its profitability, so one has to wonder about the management culture of the new company.

For the quarter ending March 26, 2010 SGI reported GAAP revenues of $107.8 million, up 15% sequentially from $94.1 million and up 143% from $44.4 million in the year-earlier quarter. GAAP net income was negative $20.2 million, improved sequentially from negative $23.0 million but worse than the $13.4 million loss year-earlier. EPS (earnings per share) was negative $0.67, improved sequentially from negative $0.77, but worse than year-earlier negative $0.45.

Much of both the revenue and loss increases from year earlier came simply from combining the two companies.

SGI, like many technology companies, now reports non-GAAP revenues that are different from its GAAP revenues. We are used to non-GAAP profits, but why revenues? GAAP now requires that when a package sold includes hardware, software, and support, that some of the revenue needs to be deferred until the software and support are used.

So SGI's non-GAAP numbers largely reflect just reporting the way people expect from past experience. Non-GAAP revenues were $128.9 million, net income negative $10.8 million, EPS negative $0.46.

Losing another $11 million in the quarter does not exactly endear SGI to investors at a time when many electronic technology companies have emerged from the recession and are rapidly ramping profits.

SGI's strategy has involved spending a lot of money updating its outdated computer systems. While it sells a variety of products, it is placing a lot of hope in the Altix UV. This is a supercomputer that scales from single-scientist size up to being the fastest in the world.

The supercomputer market is a specialty market where SGI competes with Cray, IBM, Dell, and a host of other companies. No matter how good Altix UV is, the big question is how well SGI's sales force will execute, and what is the profit margin. For some companies supercomputers are more about bragging rights than profits. SGI can't afford to be that way. They say they have pre-sold a number of Altix UVs. That is good, but what I want to see as an investor is gross profit margins good enough to also cover SGI's operating costs.

With Rackable's leftover cash of $154 million still available at end-of-quarter, today's SGI market capitalization, $250 million, could make it a tech bargain. But only if SGI's management finds a profitable model.

For more details see my SGI fiscal Q3 2010 analyst conference summary.

I am a long-term holder of SGI stock, from investing in Rackable. It has been one of my worst performing stocks. Fortunately I followed that sage advice:

Keep diversified!

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