Cray Wins Contracts with Uncle Sam as 2007 Sales Crater

Published: February 28, 2008

by Timothy Prickett Morgan

In the past two decades, the traditional supercomputer market has been transformed by the ever-increasing performance of commodity X86 and X64 processors, the invention of successively more powerful commodity interconnection electronics, and the dominance of cross-platform Linux variants that have unified the HPC landscape in a way that a more disparate Unix market never could. Even with all of the innovation that Cray brings to the table as a provider of sophisticated supercomputers and the big deals it can win, it is still tough for the company to have an orderly stream of sales and profits.

First, the good news. Cray said last week that the U.S. Department of Defense had awarded the company a multi-year contract, including hardware, software, and services, worth $30 million for the installation of four XT5 massively parallel, blade-style supercomputers. The XT5 and related XT5h supers are the fourth-generation kickers to the "Red Storm" Opteron-Linux cluster that Cray created in 2002 for the U.S. Department of Energy, which manages America's nuclear weapons stockpile. The DoD is buying five supers, and four of them will be Cray XT5 machines. (See Cray Revamps Supercomputers with XT5 Designs for more details on these machines.) The DoD is in the midst of modernizing its supercomputing capability, and the Cray XT5s will be plunked down at its Army Research Laboratory, its Naval Oceanographic Office, and its Arctic Region Supercomputing Center. (The fact that the bureaucrat in charge of the DoD's 2008 High Performance Computing Modernization Program is named Cray Henry had nothing to do with the awarding of the deals, but that is a weird coincidence, now isn't it?)

Speaking of Red Storm, Sandia National Laboratory, the DoE national laboratory where the Red Storm cluster is located, also said a few weeks ago that it would be upgrading the Red Storm cluster from its current 124 teraflops of aggregate peak number-crunching power to 284 teraflops. The initial Red Storm machine, delivered five years ago, was rated at 40 teraflops, so this cluster continues to scale, just as Cray's engineers said it would. To do the upgrade, Sandia will be adding quad-core Opterons to an unspecified number of nodes as well as boosting the main memory per node to 2 GB across the entire Red Storm cluster. Cray didn't say how much dough would be coming in thanks to this upgrade, but did say that it will be performed this summer.

Of course, the U.S. government cannot be Cray's sole customer--even if it is its biggest customer--if it hopes to survive as an ongoing public company capable of doing the very expensive research and development necessary to keep its exotic machines ahead of commodity Linux clusters using commodity interconnections. And thus far, that has been a very tough financial game to play.

In the fourth quarter, Cray's sales fell by 43.4 percent to $57.4 million, and a lot of the blame can probably be attributed to delays in deliveries and then a cache bug that was found in November in the quad-core "Barcelona" Opteron processors from Advanced Micro Devices. The huge drop in sales forced Cray to swing to a $3.6 million loss compared to an $8.7 million profit in the fourth quarter of 2006. (The red ink could have been a lot deeper, and the fact that it wasn't is a testament to Peter Ungaro, president and chief executive officer at Cray and the team he has put together to try to get Cray growing and profitable.) For the full 2007 year, Cray booked $186.2 million in sales, down 15.7 percent, and the company managed to shrink its loss for the year to $5.7 million--a far cry better than the $12.1 million loss it had in 2006 on much larger revenues even after Cray cut 8 percent of its workforce. Cray had $179.1 million in cash as it exited 2007, up $38.8 million.

"We made good progress in 2007 despite some challenges," said Ungaro in a statement accompanying the financial results. "On the positive side, we improved gross margins significantly, had a tremendous year internationally, made solid strides toward our adaptive supercomputing vision with the introduction of the Cray XT5 family of products, and improved our balance sheet, ending the year with a record level of cash. However, we did not achieve our key priorities for the year of profitability and growth, due primarily to delays in component availability and product development."

Cray said that it is shooting for profitability in 2008 and expected higher sales this year than it had last year, with the increases coming toward the final two quarters of the year. Cray is gearing up for shipments of quad-core Opteron processors in its XT4 machines in the first half of this year, the XT5h vector systems (previously code-named "BlackWidow") also in the first half, and the Cray XT5s toward the end of the year. The company added that it expected to boost research and development spending by about 20 percent, to keep gross margins about the same, and that it would spend some of its cash hoard this year as well in the first half to build up product inventories.

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