SGI Outlook Improves, Still in the Red

Silicon Graphics International, or SGI, reported seasonally down GAAP revenues of $101.6 million for its 4th fiscal quarter ending June 25, 2010. That is down 6% from the 3rd quarter. It is also up 74% from $58.4 million in the June 2009 quarter, but the high y/y revenue growth is mainly the result of a major merger (Rackable bought SGI, then took the name too), not a bounceback from the recession.

The stock is up recently, I suspect, largely because of an announced $40 million stock repurchase program. At the end of the quarter SGI had $133 million in cash. It burned $15 million in the quarter, but management thinks the company will reach break-even in 2011.

The history of SGI and Rackable is a cautionary tale, but there are always causes for optimism. During the latest analyst conference (See also my SGI Q4 2010 analyst conference call notes) management was emphasizing that the new Altix UV supercomputer began shipping. Stephen Hawking bought one; maybe he knows a thing or two. 14 were shipped, and that is not a full quarter's worth.

Also, notably, in the datacenter business (Rackable's old business), Ebay was signed up as a customer. As you can imagine, Ebay could be a very big customer. The problem is that margins have been low for internet server farms. Management reports that they are beginning to sell more Rackable products to corporations and government, outside the Internet sector, and that they can get higher margins with those clients.

Margins have been a big problem historically for both Rackable and the old SGI. Selling a government agency a supercomputer at less than cost goes against all known business-to-government selling practices. You are supposed to jack up the costs when taxpayer money is at stake. Maybe SGI needs to borrow someone from Boeing, Lockheed Martin, or Northrop Grumman to set their prices.

In the quarter gross profit was $19.6 million, operating expenses were $44.3 million, leaving an operating loss (GAAP) of $24.7 million. If operating expenses could be held flat, even doubling revenue at the current margins would not get the company to break even. Each and every product needs to have profit margins that can cover its share of operating expenses. If management can't get there, and quickly, they might as well close the business down.

As I said, they said they are going to break even in 2011, so maybe there already are good margins built into the Altix UV and other new and upcoming products.

See also my main SGI page at Openicon.com