SGI biz still kinda lumpy

But getting smoother

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When Rackable Systems bought defunct supercomputer maker Silicon Graphics and took its name last year, it got a radically expanded customer base and a shot at evening out its own lumpy business among hyperscale Internet companies with SGI's equally bumpy HPC business. The idea - and it may prove to be a sound one in the long run - is that lumpy and bumpy can run smoother. But that hasn't happened quite yet, as SGI's financial results for its most recent quarter show.

SGI reported its numbers for the second quarter of fiscal 2010 ended December 25, and clearly, the deal was good for the revenue stream for the Rackable Systems part of the company, but the profits - or lack thereof - are about the same. There is still a lot of red ink. But the company is getting into position to benefit from the rollout of new server processors in the next several months, and it's also going to change the way it recognizes revenue in fiscal 2011 so more of its sales and profits hit the books instead of being deferred for extended periods of time.

In the quarter, SGI had revenues of $94.1m, more than double the $38.8m that Rackable Systems posted all by its lonesome. The law doesn't require merged companies to merge their financials, so we don't know how this compares to SGI plus Rackable for the same thirteen weeks. But according to Jim White, SGI's chief financial officer who spoke to Wall Street analysts, post-acquisition SGI has reduced the combined operating expenses (on a non-GAAP basis, mind you) by 39 per cent.

In the first fiscal quarter ended in September 2009, SGI consolidated the headquarters and manufacturing operations of the two companies, and in the second fiscal quarter, the company's IT systems were merged onto a single Oracle applications suite. (Presumably running on Rackable's own servers and storage).

Despite all that progress on revenues, cost of operations still exceeded the revenues booked in the quarter, and even after a $4.5m tax benefit, SGI still booked a loss of $23m, 18 per cent more red ink than the standalone Rackable Systems did in the year ago quarter and 31 per cent more red ink than the combined SGI-Rackable posted (a $17.6m loss) in the first fiscal quarter ended in September, when the company had $1001.m in revenues.

Because SGI has to wait for HPC systems to be qualified before it can book the revenue and has to recognize the revenue over the term of multi-year contracts, SGI has been providing non-GAAP revenue figures in recent quarters to show that the business is not as bad off as these numbers make it seem. On a non-GAAP basis, SGI actually had $151.5m in revenues in the second fiscal quarter and had a $2.4m net income. This was much better than the $122.7m non-GAAP revenue in the September quarter when SGI reported a $3.4m non-GAAP loss.

In the quarter, server sales to cloud and Internet service providers were only 16 per cent of SGI's total sales, compared to 30 per cent last quarter. Only one company represented more than 10 per cent of sales, but SGI is not divulging who that customer is until it files its 10K report to the Securities and Exchange Commission. (Last quarter, online retailer Amazon represented more than 10 per cent of SGI's revenues, and it is very likely it was Amazon this time around too).

"The company has clearly made progress in diversifying the business," said Mark Barrenechea, president and chief executive officer at SGI, in the call. He reminded Wall Street that it wasn't that long ago that Rackable minus SGI was generating as much as 60 per cent of its quarterly sales from a few customers in a small handful of industries.

The combination of new products, like the Altix UV supers due later this year, and a slew of new server chips from Intel and Advanced Micro Devices has SGI and its channel partners geared up to attack a dozen industries where the company thinks it can get traction against IBM, Oracle, Hewlett-Packard, and Dell.

Barrenechea says that the improving economy, the server upgrade cycle, and the normal seasonality that pushes deals towards the end of a calendar year will all help lift SGI's sales in fiscal 2010, and he reiterated that SGI still believed it could hit $500m in sales. The company believes that it can push services, which accounted for 27 per cent of revenues in fiscal Q2, to around half of the company's revenues each quarter, although Barrenechea did not put a time frame on that.

He did say that this would be accomplished by pushing more support and field services and by peddling a lot more professional services. Barrenechea added that the company also has high hopes for its storage business, which accounted for 16 per cent of revenues in fiscal Q2 and which SGI says it can push up to 30 per cent of sales over the next three years thanks to direct sales of its homegrown InfiniteStorage products as well as other storage sold in conjunction with partners such as NetApp and LSI.

"I feel more and more confident in our position in the market," Barrenechea said. Dell is a commodity server maker, and IBM has its niches, he explained. HP is more focused on software and services as it is doing battle with server upstart Cisco Systems, and Oracle, now that it has eaten Sun Microsystems, is focused on tuning Sun's systems to run Oracle's software stack. "That's a good strategy for Oracle, but that is leaving a door open for us to be a provider of open compute."

That door may have only a tiny crack in it, and it will likely need a strong toe to open it further. If SGI's HPC business gets traction with the Altix UV supers and they start making real money, that could be a whole foot in the door of the data center. That's a lot of "ifs" to be sure, and a delay by Intel in delivering the Nehalem-EX Xeon-style chips used in the Altix UV supers could be as severely detrimental to SGI as the continuing delays in delivering Itanium processors was for SGI over the past decade. SGI may yet learn to source x64 processors from both Intel and AMD, as HPC rival Cray has done. ®

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