Volume 3, Number 22 -- June 13, 2006

Cray Warns Q2 Down Significantly, Affirms Guidance for Year

Published: June 13, 2006

by Timothy Prickett Morgan

In an effort to not be lumped into the same category as rival Silicon Graphics, which entered bankruptcy protection on May 8, supercomputer maker Cray is being proactive and said last week that it expected sales of its various machines and services would be up in 2006, but warned that sales in the second quarter and possibly in the third quarter might be down significantly. The company did not clarify exactly what "significantly" meant.

In the first quarter, Cray reported sales of $48.5 million, up 29 percent, and the company reduced its net loss to $5.3 million, or 6 cents a share, which was a big improvement over the $21 million loss in the prior year's first quarter. Cray had a bumpy time with the Nasdaq stock market just prior to reporting its first quarter results a month ago. On March 17, Cray announced that it wanted to review $3.3 million in revenue recognized in 2004 under product development to ensure that it was booked properly. On March 31, Cray delayed the filing of its 10-K report for 2005, and on May 10, Nasdaq sent Cray the obligatory notice of potential delisting because of the 10-K filing delay. Cray filed its 10-K on April 21, and on April 24 Nasdaq backed off. Cray had sales of $201.1 million in 2005 and a net loss of $64.3 million, which was a big improvement over the restated $145.8 million and net loss of $207.4 million from 2004. On May 2, Cray also said that Judge Thomas Zilly of the U.S. District Court for the Western District of Washington had tossed out a class action lawsuit launched in May 2005 by disgruntled investors after Cray's financials went south.

Having gotten its paperwork in order and the lawsuit dismissed, Cray doesn't want investors to get jumpy about bumpy sales going forward, which last week Cray warned Wall Street about. Even in the best of times, the high performance computing market has been plagued by rising and falling sales as big deals slosh around the quarters of a year and government and research facilities get or are denied the budgets they want to build out their supercomputer centers. The supercomputer market has never been easy, and the advent of commodity Linux clusters and parallel processing on a massive and cheap scale has not made it easier for exotic machines such as those peddled by Cray, SGI, and others to be adopted by the world's supercomputer centers. Having said that, the exotic machines that Cray sells may not be mainstream, but they are widely used by the U.S. government, which means that even if Wall Street loses patience with Cray, Uncle Sam probably will not.

While Cray warned investors that sales in the second and possibly the third quarter could be down significantly, Cray nonetheless held to its forecast of revenue growth for all of 2006, saying that sales would be up from 5 to 15 percent, depending on the timing of deals. Cray said that it expected the second half of 2006 will be stronger than the first half, with the possibility that 60 percent of its sales for the year come in the final two quarters. Cray also warned Wall Street that with sales down in the second and possibly in the third quarter--depending on when its customers accept supercomputers after putting them through their paces--it expected further that it would report a net loss in these two middle quarters of the year. Cray said that operating expenses would be down slightly in the second quarter and would increase in the second half of the year, with expenses rising highest in the fourth quarter, when it would be booking a lot of its revenue. Cray said that it expected to use its cash to pay the bills between now and then, and that it would not have to hit its credit facility.

Cray also said that the company's shareholders had approved a one-for-four reverse stock split that would take effect on June 8. After the reverse split, Cray will have 22.9 million shares of common stock outstanding and 75 million shares of authorized common stock. As we go to press, Cray shares are trading at $1.72 a piece, and the company has a market capitalization of $172.5 million.

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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik, Kevin Vandever,
Shannon O'Donnell, Victor Rozek, Hesh Wiener, Alex Woodie
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
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