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SGI-Rackable combo posts big revenue gains

And a whopping loss

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On the revenue front, the acquisition of the carcass of supercomputer maker Silicon Graphics by niche hyperscale server maker Rackable Systems looks like it was a good idea as the combination, now known as Silicon Graphics, closed out its first quarter of fiscal 2010. But in terms of profits - or the lack thereof - it doesn't look like such a good idea at all.

In the quarter ended September 25, the new and improved SGI posted sales of $100.1m, up 53.8 per cent compared to Rackable's pretty dismal solo quarter a year ago, when it saw sales drop by 25.2 per cent to $65.3m and booked a $6m loss. But in the first quarter of the new SGI's fiscal 2010, the combined company saw its costs rise on all fronts, forcing it to book an $18.5m operating loss and after some adjustments a net loss of $17.6m.

In the year-ago quarter, Rackable was sitting on $184.6m in cash, but was staring at the economic meltdown and the chilling effect it had on the kind of hyperscale deployments Rackable made a business out of. It certainly didn't help matters that HP, Dell, and IBM began peddling more dense, exotic, and energy-efficient servers to customers who might have otherwise considered Rackable's products.

So you can see why Rackable might have wanted to make a lateral move into the HPC space by acquiring the SGI assets and customer base on the relative cheap once it went into bankruptcy. But now the new SGI is sitting on only $112.7m in cash, having burned money to buy the old SGI's assets and do some restructuring. Investors have generally looked favorably on the Rackable-SGI combo, and its stock has been on the rise since March after a big collapse last fall when the server business went into a tailspin. SGI's shares ended the day at $6 a pop, giving the company a market capitalization of $181m, about 13 percent lower than a year ago.

Instead of buying SGI's assets in May for $42.5m, Rackable could have taken itself private between last fall and through the early spring; but alas, that is no longer an option.

In Wednesday's earnings announcement, the new SGI didn't offer much in the way of insight into what was selling during its first fiscal quarter.

"SGI delivered a solid quarter in terms of revenue, gross margin and operations," said Mark Barrenechea, SGI's president and chief executive officer, in a statement. "Operationally, our integration is ahead of schedule in most key areas. We also introduced new products that could expand our addressable market by over $1.7 billion while investing for long-term growth."

Jim Wheat, SGI's chief financial officer, said in a call with Wall Street analysts that the company was starting to provide non-GAAP revenue and profit figures because for the first time in its history, Rackable (as the new SGI) has a considerable amount of revenue coming from software sales, which have to be spread over future quarters. Hardware sales are booked immediately. On a non-GAAP basis, the new SGI had revenues of $122.7m in the quarter and had a loss of only $2.8m in the quarter.

Wheat added that SGI had only one customer that represented more than 10 per cent of its quarterly non-GAAP sales, and that was long-time customer Amazon. Sales into Internet service providers accounted for about a third of non-GAAP revenues in the quarter. And government and defense contractors accounted for about a quarter of sales. Educational and manufacturing companies accounted for another 23 per cent. Wheat said that 31 per cent the company's sales came from overseas during the quarter, with the remaining 69 per cent coming from the States.

While SGI is not providing revenue or profit guidance for the coming fiscal 2010 year because of the uncertainty in the global economy and the IT spending environment, Barrenechea said in the call that SGI was still comfortable with the non-GAAP figures it started using as fiscal 2009 ended, when it said that it expects sales for fiscal 2010 to be around $500m and gross margins in the range of 20 per cent or so. ®

The smart choice: opportunity from uncertainty

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