SGI

Silicon Graphics International Corp (SGI)

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Silicon Graphics International Corp. (SGI)

F2Q 2013 Earnings Conference Call

January 30, 2013 17:00 ET

Executives

John Swenson - Vice President, Investor Relations and Treasurer

Jorge Titinger - Chief Executive Officer

Bob Nikl - Chief Financial Officer

Analysts

Brian Freed - Wunderlich Securities

Amelia Harris - Sterne Agee

Presentation

Operator

Good day, ladies and gentlemen, and thank you for your patience. You have joined the Silicon Graphics International Corporation Second Quarter 2013 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Mr. John Swenson. Sir, you may begin.

John Swenson

Thank you. Good afternoon everyone. I am John Swenson, Vice President of Investor Relations and Treasurer for SGI. Welcome to our second quarter fiscal 2013 conference call for the period ended December 28, 2012. Joining me on today’s call are Jorge Titinger, SGI’s CEO and Bob Nikl, CFO.

Today’s press release is available on the Investor Relations section of our website at investors.sgi.com. This call is being webcast and a replay of the webcast will be available on our website two hours after the conclusion of the call and will remain available until the next earnings call.

Please note the Safe Harbor disclosure in our earnings release regarding forward-looking information. Today’s conference call includes forward-looking statements, including financial projections for our next fiscal quarter as well as the second half of fiscal 2013, market growth projections, and product development plans. There can be no assurance that we will achieve our financial objectives and we ask that you refer to our most recent filings with the SEC for important risk factors that could cause actual results to differ materially from these forward-looking statements. All statements made in this conference call are made only as of today’s date. SGI undertakes no obligation to update the information in this conference call, whether as a result of new information, future events or otherwise. To obtain copies of our latest SEC filings, please visit sec.gov or our website. Also during today’s call, we will make reference to several non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release, which again is posted on our website.

Now to our conference call. Jorge will provide some highlights of the company’s performance for the second quarter. Bob will then give you further detail on financial results and guidance for the third quarter of fiscal 2013. We’ll then take your questions. With that, I’d like to turn the call over to Jorge, SGI’s CEO. Jorge?

Jorge Titinger

Thank you, John and good afternoon to you all. I will start with a few comments on Q2 and then we’ll discuss our progress on our turnaround plan, as well as our market outlook. We had a solid second fiscal quarter. Compared with the same quarter last year, we achieved a 1.5 point improvement in gross margin and reduced operating expenses by more than $6 million. This resulted in non-GAAP EPS above our expectations at $0.10, an increase of 150% over the $0.04 reported one year ago. We also achieved our third consecutive quarter of improvement in working capital, growing net cash by $28 million quarter-over-quarter. This allowed us to fully pay down our line of credit and to exit the calendar year with a $128 million of cash and no debt.

As reported in our preliminary results on January 15th, revenue for the fiscal quarter was less than originally expected. As certain shipments for U.S. government customers pushed into our fiscal third quarter primarily due to uncertainly related to the fiscal cliff at year end. Specifically, in late December, system integrators and end customers in the federal space, accelerated contingency planning related to possible sequestration, which led to customer decisions to push out shipments. Ultimately, the sequestration was kicked down the road as a result of agreements that were signed into law on January 2nd, and we have since recognized more than $30 million of government-related revenue month-to-date including most of the deals that were pushed out of December.

To summarize our performance in Q2, the quarter reflected the significant progress we have made in deal quality, costs and expenses, and cash management. However, overall gross margin percentage in Q2 also benefited from favorable mix and lower manufacturing cost as a result of the lower volume. So, we believe that we still have more work to do before gross margins are consistently aligned with our target operating model. As you will remember, the mid-term target operating model is focused on achieving gross margins in the high-20s to low-30’s and operating margins in the range of 5% to 10%, by the end of calendar 2013. This timing aligns with the tactical execution phase of the turnaround, which is essentially at a halfway point as of today.

We expect to complete or initiate a number of additional actions over the course of this calendar year and primarily in enhancing responsiveness to customers, reducing costs and improving efficiency. First, we are accelerating discussions with potential supply chain partners and expect to have a contract manufacturing arrangement in place for at least one of our product lines by the end of June. Second, we are continuing an ongoing business simplification process, which is designed to significantly reduce the number of SKUs in our inventory, standardize certain product configurations and reduce cycle times. We expect this to result in faster RFP responses, better inventory turns and overall enhanced responsiveness to customers.

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