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SGI tax bennies push bigger profit in Q1

Wraps up LMDs of profit destruction, shows decent sales growth

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Jorge Titinger, the CEO who was brought into Silicon Graphics last year to clean up the mess made by $87m in low-margin deals that wrecked the company's bottom line for a few quarters, is probably breathing a little easier now that the most recent quarter has ended. Not just because revenues were up, but because the remaining $50m in those LMDs of profit destruction have been booked.

In the quarter ended in March, which is SGI's third quarter of its fiscal 2013, the company had $232.6m in revenues, an increase of 16.7 per cent over the year-ago period. SGI had $1.1m in income before taxes, and wheeled out some $8.1m in tax benefits that pushed its net income to $9.2m, significantly better than the $1.2m loss it had a year ago.

Now, SGI is once again turning its eyes towards the future, where in theory things will get easier – but in the supercomputer and hyperscale server rackets, it never really does because of the turbulent nature of both businesses. It's a good thing that companies such as SGI are willing to cope with the choppiness and still do some engineering.

In a conference call with Wall Street analysts on Tuesday, CFO Bob Nikl said that compute products made up 89 per cent of SGI's revenues in the quarter, which works out to $207m. Storage products – mainly its InfiniteStorage but also including software – comprised the other 11 per cent slice of the pie, which works out to $25.6m. That's considerably larger than the $15m in storage sales that SGI booked in the second quarter of their fiscal year.

Nikl said that the public sector accounted for 55 percent of total revenues, which is $127.9m, while hyperscale data center operators made up 14 per cent of the pie, or $32.6m. Other commercial customers made up the remaining $72.1m in sales. SGI had three customers who represented more than 10 per cent of sales in the quarter, but Nikl did not want to elaborate; presumably the names of those customers will be in the forthcoming 10-Q report with the US Securities and Exchange Commission, and presumably one of those customers is Amazon snapping up its Rackable high-density machines, as it usually is.

In the call, Titinger didn't provide a revenue breakdown by system product line, but he did talk a bit about the sales pipelines for various products. For the "UltraViolet" UV 2 shared-memory system, which is built using the NUMAlink 5 interconnect and Intel's Xeon E5 processors, he said the pipeline was up 9 per cent quarter-on-quarter, and more than double what it was last year thanks to a push into supporting large Windows databases. The goal, said Titinger, was to have UV 2 make up somewhere between 15 and 20 per cent of product revenue, which is double what it currently is.

As for the ICE X Xeon-based clusters, the sales pipeline was up 30 per cent year-on-year (compared to 16 per cent growth in the second fiscal quarter) and was now above $400m. A significant number of the deals that are in the pipeline will be decided in the next three to six months, and of course SGI doesn't win all of its deals – just like other HPC players.

Looking ahead to the fourth quarter of fiscal 2013 ending in June, SGI said to expect sales in the range of $170m to $185m, and that it would be booking $12m in restructuring charges and another $4m in other costs (such as stock-based compensation) that would push the company to a net loss of between 29 cents and 34 cents per share. If you ignore those charges, then SGI will have a non-GAAP net income of between 12 cents and 17 cents per share. But of course, you can't ignore them.

SGI was not in a mood to do any projections for fiscal 2014, and given the state of the global economy and government budgets – as if the two could be separated – you can't blame Titinger and Nikl from shying away. ®

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