SGI

Silicon Graphics International Corp (SGI)

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Silicon Graphics (SGI)

F1Q13 Earnings Call

November 6, 2012 05:00 AM ET

Executives

John Swenson - IR

Jorge Titinger - CEO

Bob Nikl - CFO

Analysts

Brian Freed - Wunderlich Securities

Alex Kurtz - Sterne Agee

Shebly Seyrafi - FBN Securities

Mike Shinnick - Wasatch

Presentation

Operator

Good day ladies and gentlemen and welcome to the SGI first quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for today’s conference, John Swenson, of SGI. Sir, you may begin.

John Swenson

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

Today’s press release is available on the Investor Relations section of our website at www.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 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 on 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 www.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 highlights of the company’s performance for first quarter. Bob will give further detail on financial results and guidance for second quarter fiscal 2013. We will then take your questions. With that, I would like to turn the call over to Jorge Titinger, SGI’s CEO. Jorge?

Jorge Titinger

Thank you, John, and good afternoon to you all. Let me begin by providing some financial highlights for the fiscal first quarter. I'm pleased to report that we had a solid Q1. Revenue for the quarter was $193 million which is up 7% from the prior quarter and up 8% from the first quarter of last year. Our non-GAAP gross margin was 22.4% which is consistent with our expectations given the mix of low margin deals or LNDs that were recognized in revenue for the quarter.

We reduced non-GAAP operating expenses by approximately $3 million or 6% quarter-over-quarter. We also increased our net cash position by $7 million from the prior quarter which reflects favorable working capital performance as well as a $5 million pay down on our credit line. We have been driving improvements throughout the company, some of which are reflected in the first quarter results. One of our top objectives in the short term has been to get these LNDs behind us, while media and customer commitments and managing the resulting challenges to profitability and cash flow.

Over the last two quarters, we have worked through seven of the nine margin deals that we originally identified and we now have two deals remaining to recognizing revenue with an aggregate value of roughly 50 million. As Bob will explain in the guidance discussion, we are working to recognize as much as possible of this remaining business in Q2. However, due to various factors, it is probable that most if not all, will be recognized in Q3. As a result, we believe Q2 represents a better reflection of our business without the impact of LNDs at this stage of our turnaround.

Another short term objective has been to enhance the functions and processes that will allow us to better measure and manage the quality of our deals so that we can achieve our margin objectives over time. We believe we are succeeding both fronts. Our deal management is improving with broader and deeper review of all opportunities in terms of margin and cash flow. The best measure of our success is the improvement in the margin profile and working capital requirements of our backlog which we believe will be evident in our financial results in coming quarters.

On our last earnings call, we introduced our strategic plan which is designed to enhance our value proposition for customers and enable us to achieve our business model. The plan has three primary components, increased focus on key vertical markets, investment in horizontal solution such as Big Data storage and scale of computing and operational excellence.

Let me give you an update on the actions we have taken so far to make this plan a reality. We already are active in our focused market segments. Today, we recognize approximately three quarters of our revenue from customers in these focus areas globally. Together, these represent a serve market of more than $20 billion, with many growing at a high single digit CAGR. As I mentioned on our last call, we are targeting these markets not only because of their size and growth potential but most importantly because these customers are attempting to solve problems that require the speed and scale of our solutions. We believe we bring differentiated value to these markets which ultimately will improve our market share position and our margin profile. Our approach is straight forward. We have good reference accounts in all of these segments. We are investing in additional market development resources and campaigns, shifting or adding to account coverage, collaborating with other vendors in the echo system and optimizing our hardware and software for key applications.

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