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SGI Reports Financial Results for Third Quarter of Fiscal 2011 and Reaffirms Guidance

FREMONT, Calif., May 3, 2011 - SGI (NASDAQ:SGI), a trusted leader in technical computing, today announced financial results for its third quarter of fiscal 2011.

Financial Highlights for Q3 FY11

  • Record Q3 Revenue. GAAP Revenue $143.7 million, up 33% Y/Y; Non-GAAP Revenue $135.8 million, up 5% Y/Y
  • Record Q3 Gross Margin. GAAP Gross margin 28.2%, up 137 bps Y/Y; Non-GAAP Gross Margin 29.9%, up 235 bps Y/Y
  • GAAP EPS of ($0.05) compared to ($0.67) last year; Non-GAAP EPS of $0.07 compared to ($0.36) last year
  • Cash of $133.8M million, up 20% Q/Q
  • Re-affirming FY2011 guidance; Non-GAAP EPS expected between $0.40 and $0.50

"It was the fastest start to a calendar year we have ever experienced," said SGI CEO Mark J. Barrenechea. "We expect FY11 revenue to grow at nearly twice the industry growth rate. Further, we are focused on profitable growth and achieved non-GAAP profitability for the second straight quarter."

Barrenechea added, "Separately, our strategic rationale for purchasing SGI Japan has only strengthened since we closed the transaction. As Japan increases its investments in infrastructure, science and research, SGI products and services are well positioned to meet customer needs. In the first 45 days since closing the transaction, we have won business at the Semiconductor Energy Laboratory, the International Fusion Energy Research Center and Kyoto Sangyo University. Further, we have customers in production on our HPC Cyclone™ cloud service."

Business Highlights for Q3 FY11

  • Completed the acquisition of SGI Japan, Ltd.
  • Announced record-scaling certification and immediate availability of Altix® UV with Windows Server 2008 R2.
  • SGI Rackable® products achieved a world record for performance-per-watt, outperforming comparable systems from Dell, IBM and HP.
  • Introduced SGI ArcFiniti™ integrated data archive solution.
  • Customer successes within the quarter include: Amazon, NASA, University of Delaware, 3M, Carbonite, Complete Genomics, Universidale Federal do Rio Grande do Norte (Brazil), The Genome Analysis Centre (UK), Comprehensive Nuclear Test Ban Treaty Organization (Austria), Danmarks Tekniske Universitet (Denmark), Genome Institute of Singapore and Semiconductor Energy Laboratory (Japan).
  • Strong industry performance in Public Sector, Cloud and Manufacturing sectors.

The Company's channel business contributed 21%, international business contributed 34% and services contributed 28% of non-GAAP revenue. Public sector, cloud and manufacturing were the strongest vertical markets this quarter.

"We expect to be well within our FY11 guidance, while delivering non-GAAP EPS between $0.40 and $0.50," said SGI CFO James Wheat. "Last quarter we identified four focus areas for fiscal 2011 which are to deliver against our financial plan for 2011, maximize sales opportunities for our products and services, expand our market opportunity and continue market driven innovation balanced against our goal of being efficient with our operating expenses. We continue to execute on each of these objectives."

SGI ended Q3 FY11 with $133.8 million in cash (includes restricted cash, equivalents and investments), up 20%, representing a $22.3 million increase from the prior quarter.

Starting in FY11, we adopted new revenue recognition accounting standards. These new standards did not impact our non-GAAP results. For our FY11 Q3 GAAP results, $25.5 million of revenue and 13 basis points of gross margin were directly attributed to adoption of these new standards.

Fiscal Year 2011 Guidance
SGI is reiterating its previously released non-GAAP guidance for fiscal 2011 and internal plan for fiscal 2012:

As it relates to FY11 non-GAAP guidance, we are expecting revenues at the midpoint of the range, gross margin in the upper half of the range, and EPS between $0.40 and $0.50.

Conference Call Information

In conjunction with this earnings press release, SGI has posted an earnings presentation which incorporates CFO commentary to its investor relations section of its web site at The Company will discuss these financial results in a conference call at 2:00 p.m. PT today, May 3, 2011. The public is invited to listen to a live web cast of the call on the Investor Relations section of the Company's website. A replay of the web cast will be available approximately two hours after the conclusion of the call and remain available until the next earnings call. An audio replay of the conference call will also be made available approximately two hours after the conclusion of the call. The audio replay will remain available for five days and can be accessed by dialing (706) 645-9291 or (800) 642-1687 and entering the confirmation code: 60144271.

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Cautionary Statement Regarding Forward Looking Statements
This press release contains forward-looking statements; including statements regarding SGI's guidance for 2011 financial performance, general business outlook and anticipated product performance and offerings. Any statements contained herein that are not statements of historical fact may be deemed forward-looking statements. Actual results may differ materially from forward-looking statements due to a number of risks and uncertainties including those associated with: SGI's more extensive international operations; economic conditions impacting the purchasing decisions of SGI's customers; SGI operates in a very competitive market, and increased competition and competitors' new products, have in the past, and may continue, to cause pricing pressure on SGI's products, which would negatively affect SGI's gross and operating margins, as well as other financial measures; a significant portion of the Company's revenues has come from a limited number of customers, and so the delay in placing an order, or the failure of a significant customer to place additional orders, could have a significant negative effect on SGI's financial performance; SGI relies on sales to U.S. government entities and has limited experience dealing with the U.S. government as a customer; SGI is unable to control component pricing, such as what our suppliers charge for central processing units, and, as has happened in the past, component pricing can rise unexpectedly, negatively impacting SGI's gross margins as well as other financial measures; SGI's operations in Japan, which may be negatively affected by earthquakes and other natural disasters, as well as potential power supply disruptions following the March 2011 earthquake and tsunami; and SGI may be required to write-off additional significant amounts of excess and obsolete inventory. Detailed information about these and other potential factors that could affect SGI's business, financial condition and results of operations is included in SGI's annual report on Form 10-K under the caption "Risk Factors," in Part I, Item 1A of that report, filed with the Securities and Exchange Commission ("SEC") on September 8, 2010, as updated by SGI's subsequent filings with the SEC, all of which are available at the SEC's Web site at You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this announcement. SGI undertakes no responsibility to update the information in this announcement, except as may be required by law.

Use of Non-GAAP Financial Measures
The non-GAAP financial measures discussed in the text of this press release and accompanying non-GAAP supplemental information are financial measures used by SGI's management to evaluate the operating performance of the Company and to conduct its business operations. All non-GAAP financial measures discussed and presented in this press release excludes the revenue and associated costs of revenue deferred in accordance with Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC"), ASC985-605 "Software Revenue Recognition" for certain of the Company's transactions where software is more than incidental to the overall product solution sold, as well as revenue deferred in accordance with FASB ASC 605-25 "Revenue Recognition - Multiple-Element Arrangements" where the selling price of a delivered product or service exceeds its fair value. Non-GAAP gross profit and gross margin also excludes stock-based compensation expense, amortization of intangible assets, and an inventory step up arising from acquisition of substantially all the assets of Silicon Graphics, Inc. Non-GAAP operating expenses include Research and Development, Sales and Marketing and General Administrative expenses. Non-GAAP operating expenses exclude amortization of intangible assets, stock based compensation, restructuring and acquisition-related charges. Non-GAAP net income/(loss) per share excludes the same items as discussed above, as well as, realized gains related to the sale of the Company's Auction Rate Securities and the other-than-temporary impairment of an equity investment and certain auction rate securities. Management presents non-GAAP financial measures because it considers them to be important supplemental measures of performance. Management believes that the excluded charges are not central to the Company's core operating performance and uses the non-GAAP financial measures for planning purposes, including analysis of the Company's core operating performance against prior periods, the preparation of operating budgets and to determine appropriate levels of operating and capital investments. Management excludes from its non-GAAP financial measures the items cited above, whether or not recurring, to facilitate its review of the comparability of the Company's core operating performance on a period to period basis as well as to better understand the fundamental economics of a specific period's operational and financial performance. Management uses this view of the Company's operating performance for purposes of comparison with its business plan and individual operating budgets and allocations of resources. Management also believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating the Company's financial and operational performance in the same way that management evaluates SGI's financial performance. However, these non-GAAP financial measures have limitations as an analytical tool, as they exclude the financial impact of transactions necessary or advisable for the conduct of the Company's business, such as the granting of equity compensation awards and are not intended to be an alternative to financial measures prepared in accordance with GAAP. Hence, to compensate for these limitations, management does not review these non-GAAP financial metrics in isolation from its GAAP results, nor should investors. Pursuant to the requirements of SEC Regulation G, a detailed reconciliation between the Company's GAAP and non-GAAP financial results is provided at the end of this press release. Investors are advised to carefully review and consider this information as well as the GAAP financial results that are disclosed in the Company's SEC filings.

Contact Information:
Vanessa Chan
SGI Investor Relations

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