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SGI tax bennies push bigger profit in Q1

Wraps up LMDs of profit destruction, shows decent sales growth

Security for virtualized datacentres

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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