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Cray swings profit on Q4 revenue dive

Thanks, Uncle Sam

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Supercomputer maker Cray finished out 2009 better than many might have expected it to do, reversing to a modest $3m profit on a 43 per cent revenue decline to $88.3m in the fourth quarter ended in December.

It is hard to blame your biggest customer for cutting into your sales and profits, and Cray came as close as it dared to pointing the finger at Uncle Sam for its diminished numbers in the fourth quarter.

As Cray said back in January, the Defense Advanced Research Projects Agency, the R&D arm of the U.S. military, has revamped its contract for a prototype of the "Cascade" massively parallel super, which was originally conceived as a hybrid system mixing X64 and unspecified accelerator nodes with a new generation of interconnect called Aries.

Cascade machines are intended to span up to hundreds of petaflops, compared to the single petaflops XT5 systems Cray can build today. While neither Cray nor DARPA are being clear about what still remains in the Cascade system, what is known is that DARPA chopped $60m from the Cascade prototype project, which was originally awarded a total of $293.1m in two phases of funding. Cray had $152.5m in money that was still expected for the Cascade project, and DARPA busted it down to $92.5m.

This money from DARPA is not booked as revenue, but rather as reimbursement for research and development expenses, explained Peter Ungaro, Cray's president and chief executive officer, in a conference call with Wall Street analysts going over the fourth quarter numbers. And Ungaro said further that DARPA is expected to get its Cascade prototype at the end of 2012 and that Cray will commercialize the product and sell it to others "shortly thereafter."

This is more or less how the XT line of massively parallel supers came into being, with Uncle Sam's Sandia National Laboratories ponying up $90m to build the "Red Storm" parallel Opteron-Linux super that Cray eventually commercialized as the XT3 and improved as the XT4 and XT5.

Despite the wrangling with DARPA over the Cascade project, things have looked far worse for Cray than they did as 2009 came to a close. Given the lumpiness of the supercomputer racket, where vendors have only dozens of key customers for a system and research and development costs kick in way ahead of product deliveries, it is not surprising that Cray's sales fell in the fourth quarter.

While Cray's product revenues were cut by more than half to $65.2m, this was to be expected given that Advanced Micro Devices is getting ready to put new twelve-core Opteron 6000 processors into the field and Cray is getting ready to plunk these chips into its XT6 supers and their midrange brethren, the XT6m supers. The XT6 and XT6m compute blades will offer roughly twice the number-crunching oomph as the current XT5 and XT5m blades, which are based on six-core Opteron 2400 series chips.

That extra compute power is worth waiting for, particularly if it doesn't cost that much extra. For the year, Cray's product sales fell by 9.1 per cent, to $199.1m.

One of the saving graces in the quarter and for all of 2009 was Cray's custom engineering business, where it does bespoke systems and data center design for a fee. This business, which accounted for more than $30m in revenues in 2009 according to Ungaro, grew at more than a 400 per cent rate last year and was a key reason why services revenues were up in Q4 and for the entire 2009 year. In the fourth quarter, Cray's overall services revenues were up by 27.9 per cent, to $23.1m.

For the full year, services revenues rose by 33 per cent to $84.9m. If you do some math on what Ungaro said, then the custom engineering biz had to be miniscule in 2008, and without it in 2009, services revenues would have been off by around 14.5 per cent, to about $54.5m.

Ungaro said that the three growth areas that Cray initiated in 2009 to broaden its product portfolio and to expand its addressable market in the $10bn supercomputing market - that would be custom engineering, the XT5m mini-MPP, and the CX1 personal supercomputer - accounted for more than $40m in revenues in 2009. That means the XT5m and the CX1 accounted for around $10m, and it is our guess that the CX1 was not very much of that.

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