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SGI's strategy has involved spending a lot of money updating its outdated computer systems.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!
See also: www.sgi.com
Showing posts with label Silicon Graphics. Show all posts
Showing posts with label Silicon Graphics. Show all posts
Thursday, May 6, 2010
Tuesday, February 2, 2010
SGI Revenues: GAAP v. non-GAAP
SGI (Silicon Graphics International) reported results for its quarter ending December 25, 2009 today, and the numbers look good to me. However, that interpretation requires breaking a general rule.
I like to use GAAP (Generally Accepted Accounting Principle) numbers unless there are good reasons to use non-GAAP numbers for putting a value on a company. Usually revenues are the same, or close, for GAAP and non-GAAP. If there are differences, they appear as non-GAAP net income and EPS. In the past some companies have pushed non-GAAP numbers that misled investors.
In this quarter, for SGI, GAAP revenues were $94.1 million, but non-GAAP revenues were $151.5 million. How can that be? In this case, apparently the higher figure represents payments received on equipment and services sold. But because the high-end computer equipment sold by SGI includes software and maintenance commitments, all of the revenue can't be booked under the accounting rules used.
SGI results from a combination of Rackable Systems and the old, bankrupt Silicon Graphics that took place in 2009. The old SGI was technologically formidable, but had a business culture of putting innovation above profits. I had some worries that the combination might end up with the wrong culture, but so far I have been pleasantly surprised. Rackable bought SGI's assets for a song, and brought a big pile of cash into the combined company. Having shed its debt and some not-so-brilliant business ideas, SGI looks pretty hot. It sells supercomputers and other high end products and services to government agencies and enterprises that need them. Rackable, of course, was known as the leading vendor for energy efficient server farm systems.
Still, there is a way to go before getting too bullish on the future of SGI. Non-GAAP net income was only $5.6 million, or $0.18 per share. While that might seem to justify today's stock price, there are a lot of moving parts involved.
I own some SGI stock (I kept my RACK stock), but would like to see at least a couple more quarters of good revenues and profits before adding significantly to it. It is a classic investor dilemma. If I wait and SGI does well, I'll certainly have to buy in at a higher price than today's. On the other hand, the potential for going back to a string of losses with just an occasional quarter of profits is all too real at this point.
For a detailed account, see my SGI Analyst Conference Summary for 2/2/2010. The new corporate web site is www.sgi.com.
So I had better ...
Keep diversified!
I like to use GAAP (Generally Accepted Accounting Principle) numbers unless there are good reasons to use non-GAAP numbers for putting a value on a company. Usually revenues are the same, or close, for GAAP and non-GAAP. If there are differences, they appear as non-GAAP net income and EPS. In the past some companies have pushed non-GAAP numbers that misled investors.
In this quarter, for SGI, GAAP revenues were $94.1 million, but non-GAAP revenues were $151.5 million. How can that be? In this case, apparently the higher figure represents payments received on equipment and services sold. But because the high-end computer equipment sold by SGI includes software and maintenance commitments, all of the revenue can't be booked under the accounting rules used.
SGI results from a combination of Rackable Systems and the old, bankrupt Silicon Graphics that took place in 2009. The old SGI was technologically formidable, but had a business culture of putting innovation above profits. I had some worries that the combination might end up with the wrong culture, but so far I have been pleasantly surprised. Rackable bought SGI's assets for a song, and brought a big pile of cash into the combined company. Having shed its debt and some not-so-brilliant business ideas, SGI looks pretty hot. It sells supercomputers and other high end products and services to government agencies and enterprises that need them. Rackable, of course, was known as the leading vendor for energy efficient server farm systems.
Still, there is a way to go before getting too bullish on the future of SGI. Non-GAAP net income was only $5.6 million, or $0.18 per share. While that might seem to justify today's stock price, there are a lot of moving parts involved.
I own some SGI stock (I kept my RACK stock), but would like to see at least a couple more quarters of good revenues and profits before adding significantly to it. It is a classic investor dilemma. If I wait and SGI does well, I'll certainly have to buy in at a higher price than today's. On the other hand, the potential for going back to a string of losses with just an occasional quarter of profits is all too real at this point.
For a detailed account, see my SGI Analyst Conference Summary for 2/2/2010. The new corporate web site is www.sgi.com.
So I had better ...
Keep diversified!
Wednesday, April 1, 2009
Rackable Systems Eats Silicon Graphics
When I moved to San Francisco in the early 1990's and started meeting the computer graphics crowd, the place everyone said they wanted to work was Silicon Graphics. Not only was that where the cutting edge lay, it was also seen as a smart career move. Surely, in a few years, Silicon Graphics would surpass HP and then Intel and IBM.
It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.
Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.
What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.
So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.
Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.
SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)
Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.
On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.
SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.
Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.
I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.
See also my Rackable Systems page, with links to Rackable analyst conference summaries.
It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.
Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.
What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.
So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.
Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.
SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)
Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.
On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.
SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.
Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.
I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.
See also my Rackable Systems page, with links to Rackable analyst conference summaries.
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