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Cray Inc. (CRAY)

Q4 2008 Earnings Call

February 10, 2009 9:10 pm ET

Executives

Paul Hiemstra – Investor Relations

Peter J. Ungaro – President and Chief Executive Officer

Kenneth W. Johnson – Senior Vice President, General Counsel and Corporate Secretary

Brian C. Henry – Executive Vice President and Chief Financial Officer

Analysts

Chad Bennett – Northland Securities

Douglas Reid – Thomas Weisel Partners

Glenn Hanus – Needham & Company

Sid Parakh – McAdams Wright Ragen

Daniel Berkley – O’Conner

Presentation

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Cray reports Fourth Quarter 2008 financial results conference call. During the presentation all parties will be in a listen-only mode and following today’s presentation the conference will be opened for questions. (Operator instructions) This conference is being recorded today Tuesday, February 10 of 2009. At this time I would like to turn the conference over to Mr. Paul Hiemstra. Mr. Hiemstra is Director of Treasury and Investor Relations. Please go ahead, sir.

Paul Hiemstra

Good afternoon. I’d like to thank everyone for joining us today. Participating from Cray are Pete Ungaro, President and Chief Executive Officer; Brian Henry, Executive Vice President and Chief Financial Officer; and Ken Johnson, Senior Vice President and General Counsel.

This call is being broadcast live on the Internet and recorded for replay purposes. A replay will be available shortly after the call. You can access the replay by dialing 1-800-405-2236. International callers can dial 303-590-3000. You must then enter the access code 11126368 followed by the pound sign. A replay will also be also available in the Investor Relations section of the Cray website for 180 days at www.cray.com.

During the course of this call management will make projections or other forward-looking statements regarding potential future events or the financial performance of the company. We want to caution you that such statements are current expectations, and actual events or results may differ materially. Please refer to the documents, which the company files from time-to-time with the Securities and Exchange Commission. They contain and identify important risk factors that could cause the actual results to differ materially from those contained in the projections or forward-looking statements.

With that, I would like to turn the call over to Pete Ungaro.

Peter J. Ungaro

Thanks you Paul and thank you all for joining the call today. I’d like to begin with some comments around our 2008 performance and progress on our key focus areas for the year. Brian Henry will then discuss the financial results and our outlook for 2009, and following Brian's comments, I will lay out our priorities going forward, and open up the call for Q&A.

Without a doubt, 2008 was an exceptional year across the board. We made great strides toward our corporate goals of growth and sustained profitability, while expanding our addressable market and improving the balance sheet. We delivered strong growth both year-over-year and historically posting a 52% annual increase in revenue, driven by strong growth in both products and services.

Gross margins also increased for the fourth straight year, a solid streak as we continue to improve internal processes and deliver highly differentiated supercomputers at exceptional value. Our $111 million gross profit in 2008 was also a company record and a 70% increase over 2007.

When excluding the non-cash goodwill impairment from our results, we posted a significant profit for both the quarter and the year. Now, I’d like to take some time to give you a view of our progress against the three key priorities we discussed throughout 2008, which were designed to enable us to achieve our long-term goal.

First we continue to focus on our product development, delivery, and acceptance plans. Along these lines, we launched two new products in 2008. The XT5 and CX1, both designed to expand our addressable market, improve our competitive position in the HPC industry, and grow market share.

Our flagship XT5 system began shipping in the third quarter, and is a most scalable Linux-based supercomputer in the world, combining unprecedented sustained application performance with exceptional manageability, and lower cost of ownership. This outstanding value continues to drive strong demand in the market as we now ship more processors through our XT line than any other supercomputer line in our history, even going back to the days of Cray Research. Since we started shipping in Q3, we have delivered nearly 400 XT5 cabinets, an additional 100 cabinets worth of XT5 upgrades to customers around the globe.

In order to satisfy this unprecedented demand, we need substantial enhancements and improvements to our manufacturing facility and processes, a concerted effort to increase efficiency and repeatability. We expect these improvements to continue to pay dividends throughout 2009 and beyond.

Of all of the Cray XT5 systems in service, the largest installation known as Jaguar, resides at the Oak Ridge National Laboratory. This system is remarkable on several levels and I want to try to give you a feel for the scope of this amazing supercomputer. Jaguar consists of 284 refrigerator size cabinets, all scaled together to form an incredibly powerful and efficient system, cooled by innovative ECOflex liquid cooling technology. This system takes up a little more floor space than a basketball court. Its peak performance is 1.64 petaflops, which is equal to 250,000 computations every second by every human on the planet.

This performance is driven by a 180,000 processor cores computing data held in 362 terabytes of memory, which is over three times more memory than the next largest memory system in the world. Over 4,300 miles of Cray C-STAR cables tie all the processors in the system together and over 4 miles of Infiniband cables connect the system to more than 16,000 discs, serving data to and from the machine at a rate of over 280 gigabytes a second.

In just a few days after we installed the system, Jaguar is up and running scientific applications ranging from material science to combustion research across the entire machine, and one of the first and still the only system in the world to run a scientific application at over one petaflops of sustained performance. It did this on two different applications all within a month of booting the full system for the first time. It is truly an amazing system and one that we are very proud of.

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