Cray Inc. Reports Second Quarter 2013 Results

Company Increases Revenue Outlook for 2013

Marketwired

SEATTLE, WA--(Marketwired - Jul 31, 2013) -  Global supercomputer leader Cray Inc. (NASDAQ: CRAY) today announced financial results for the second quarter ended June 30, 2013. Revenue for the quarter was $84.5 million compared to $84.2 million in the prior year period. Cray reported a net loss for the quarter of $0.2 million or $0.00 per share compared to net income of $147.4 million or $3.91 diluted income per share in the second quarter of 2012. Net loss results for the second quarter of 2013 were positively impacted by a $9.3 million tax benefit which resulted from the partial release of the valuation allowance held against Cray's deferred tax assets. The second quarter of 2012 operating results included a $139.1 million pre-tax gain, which resulted from the sale of the Company's interconnect hardware development program to Intel Corporation.

All figures in this release are based on U.S. GAAP unless otherwise noted. A reconciliation of GAAP measures to non-GAAP measures is included with the financial tables of this press release. Non-GAAP net loss, which adjusts for selected unusual and non-cash items, was $7.0 million or $0.19 per share for the second quarter of 2013, compared to non-GAAP net income of $12.8 million or $0.34 per share for the second quarter of 2012.

Revenue for the six-month period ended June 30, 2013 was $164.0 million compared with $196.5 million in the prior year period. Non-GAAP net loss for the first six months of 2013 was $15.4 million, compared to non-GAAP net income of $21.8 million for the prior year period.

Total gross profit margin for the second quarter of 2013 was 32% compared to 41% for the second quarter of 2012. Non-GAAP total gross profit margin for the second quarter of 2013 was 33% compared to 41% for the second quarter of 2012. For the second quarter of 2013, product margin was 24% and service margin was 54%. Product margin for the second quarter of 2013 was negatively impacted in part by higher than anticipated costs on a single, large installation. Without the additional costs associated with this installation, product margin for the quarter would have been 8 percentage points higher, at 32%, and total gross profit margin would have been 6 percentage points higher, at 38%.

Operating expenses for the second quarter of 2013 were $36.6 million, compared to $22.1 million in the prior year period. Second quarter of 2012 operating expenses benefited from $15 million in R&D co-funding credits related to the Company's DARPA contract, which was completed in 2012. Non-GAAP operating expenses for the second quarter of 2013 were $35.0 million compared to $20.9 million in the prior year period.

The second quarter of 2013 operating results included $3.5 million for depreciation. Non-cash, pre-tax items excluded for non-GAAP purposes for the second quarter of 2013 were $0.6 million for amortization of acquired and other intangibles, $0.1 million for purchase accounting adjustments, and $1.6 million for stock compensation expense.

As of June 30, 2013, cash and investments totaled $253 million compared to $251 million as of March 31, 2013. Working capital increased during the second quarter to $285 million compared to $283 million at the end of the first quarter.

"We had a good second quarter, with continued progress across each of our different product offerings, and we ended the first half of the year ahead of our revenue track," said Peter Ungaro, president and CEO of Cray. "Our supercomputing business continues to be strong, highlighted by several exciting new wins around the world in the last few months, including flagship wins at both the European Centre for Medium-Range Weather Forecasts and the ARCHER project for the UK national supercomputing facility. In big data, we recently launched our Cray Cluster Connect offering, a complete, end-to-end high performance storage solution for any x86 Linux cluster. On the analytics front, we had a number of exciting wins in our YarcData group, signing up new customers across several of our key market segments for our Urika real-time data discovery platform. We're in a strong competitive position right now and I'm really excited about the momentum we've built throughout our business. With an increase to our outlook today, we're anticipating strong revenue growth of more than 20% for the year and solid profitability."

2013 Outlook
While a wide range of results remains possible for 2013, we expect revenue to be approximately $520 million for the year. Revenue in the third quarter is expected to be about $90 million. For 2013, total gross profit margin is anticipated to be in the mid-30% range. Total operating expenses for 2013 are expected to be in the range of $160 million. Non-GAAP adjustments to pre-tax earnings are anticipated to be over $10 million in 2013, driven by stock-based compensation and acquisition related expenses. Based on this outlook, we expect to be profitable on a GAAP and non-GAAP basis for 2013.

Following a partial release of Cray's deferred tax asset valuation allowance in the second quarter of 2013, the Company expects to record an income tax benefit for the year. Based on this outlook, due to Cray's substantial net operating loss carryforwards, the annual income tax provision is expected to be largely non-cash and the effective non-GAAP tax rate is expected to be 7-10%.

Actual results for any future period are subject to large fluctuations given the nature of Cray's business.

Recent Highlights

  • In July, Cray won a new $30 million contract to deliver a Cray XC30 supercomputer and a Cray Sonexion storage system for the UK national supercomputing facility at the University of Edinburgh in Scotland, as part of the ARCHER project.
  • In June, Cray was awarded a contract valued at more than $65 million by the European Centre for Medium-Range Weather Forecasts (ECMWF), one of the world's premier numerical weather prediction and research centers, to deliver a Cray XC30 supercomputer and Cray Sonexion storage for their next operational facility. 
  • In June, the Company launched Cray Cluster Connect, a complete Lustre storage solution for x86 clusters across the HPC and big data computing markets. Cray Cluster Connect provides customers with an end-to-end Lustre solution consisting of hardware, networking, software, architecture and support.
  • In May, Cray introduced the Cray XC30-AC supercomputer, the Company's new addition to its series of Cray XC30 systems. The system features all of the advanced high performance technologies offered in the XC30 system with prices starting at $500,000.
  • In the second quarter, Cray announced that the Cray CS300 cluster supercomputers are available with Intel Xeon Phi coprocessors which are optimized to deliver the highest levels of parallel performance to power breakthrough innovations across an array of scientific fields. Also in the second quarter, Cray launched a new turnkey Hadoop offering built on an optimized configuration of the Cray CS300 system.
  • In the second quarter, Cray's YarcData division was awarded multiple new contracts for its Urika system, a big data appliance for real-time data discovery.
  • In the second quarter, Cray's YarcData division was named a 2013 Gartner "Cool Vendor" in Content and Social Analytics. The Gartner report found that gaining insights across multi-structured data is one of the biggest opportunities to derive value from analytics. 

Conference Call Information
Cray will host a conference call today, Wednesday, July 31, 2013 at 1:30 p.m. PDT (4:30 p.m. EDT) to discuss its second quarter 2013 financial results. To access the call, please dial into the conference at least 10 minutes prior to the beginning of the call at (855) 894-4205 and enter the access code 24952249. International callers should dial (832) 900-4685. To listen to the audio webcast, go to the Investors section of the Cray website at http://investors.cray.com.

If you are unable to attend the live conference call, an audio webcast replay will be available in the Investors section of the Cray website for 180 days. A telephonic replay of the call will also be available by dialing (855) 859-2056, international callers dial (404) 537-3406, and entering the access code 24952249. The conference call replay will be available for 48 hours, beginning at 4:30 p.m. PDT on Wednesday, July 31, 2013.

Use of Non-GAAP Financial Measures
This press release contains "non-GAAP financial measures" under the rules of the U.S. Securities and Exchange Commission. A reconciliation of GAAP to non-GAAP results is included in the financial tables included in this press release. Management believes that the non-GAAP financial measures provide additional insight for analysts and investors in evaluating Cray's financial and operational performance in the same way that the management evaluates Cray's financial performance. However, these non-GAAP financial measures have limitations as an analytical tool, as they exclude the financial impact of transactions necessary or advisable for the conduct of Cray's business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. Hence, to compensate for these limitations, management does not review these non-GAAP financial metrics in isolation from its GAAP results, nor should investors. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles. This non-GAAP information supplements, and is not intended to represent a measure of performance in accordance with, or disclosures, required by generally accepted accounting principles, or GAAP. These measures are adjusted as described in the reconciliation of GAAP to non-GAAP numbers at the end of this release, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review and consider this non-GAAP information as well as the GAAP financial results that are disclosed in Cray's SEC filings.

About Cray Inc.
Global supercomputing leader Cray Inc. (NASDAQ: CRAY) provides innovative systems and solutions enabling scientists and engineers in industry, academia and government to meet existing and future simulation and analytics challenges. Leveraging 40 years of experience in developing and servicing the world's most advanced supercomputers, Cray offers a comprehensive portfolio of high performance computing (HPC) systems, storage, and Big Data solutions delivering unrivaled performance, efficiency and scalability. Cray's Adaptive Supercomputing vision is focused on delivering innovative next-generation products that integrate diverse processing technologies into a unified architecture, allowing customers to surpass today's limitations and meeting the market's continued demand for realized performance. Go to www.cray.com for more information.

Safe Harbor Statement
This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, including, but not limited to, statements related to Cray's financial guidance and expected future operating results and its product sales and delivery plans. These statements involve current expectations, forecasts of future events and other statements that are not historical facts. Inaccurate assumptions as well as known and unknown risks and uncertainties can affect the accuracy of forward-looking statements and cause actual results to differ materially from those anticipated by these forward-looking statements. Factors that could affect actual future events or results include, but are not limited to, the risk that Cray does not achieve the operational or financial results that it expects, the risk that Cray is not able to successfully complete its planned product development efforts in a timely fashion or at all, the risk that Cray is not able to realize the expected benefits of the acquisition of Appro and Cray's new Cluster Solutions business, the risk that Cray's Big Data growth initiatives, including storage, are not successful, the risk that Cray will not be able to secure orders for Cray systems to be delivered and accepted in 2013 when or at the levels expected, the risk that the systems ordered by customers are not delivered when expected or do not perform as expected once delivered, the risk that customer acceptances are not received when expected or at all, the risk that Cray is not able to achieve anticipated gross margin or expense levels, and such other risks as identified in Cray's quarterly report on Form 10-Q for the period ended June 30, 2013, and from time to time in other reports filed by Cray with the U.S. Securities and Exchange Commission. You should not rely unduly on these forward-looking statements, which apply only as of the date of this release. Cray undertakes no duty to publicly announce or report revisions to these statements as new information becomes available that may change Cray's expectations.

Cray is a registered trademark of Cray Inc. in the United States and other countries and Sonexion, YarcData and Urika are trademarks of Cray Inc. Other product and service names mentioned herein are the trademarks of their respective owners.

   
   
CRAY INC. AND SUBSIDIARIES  
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  
(Unaudited and in thousands, except per share data)  
   
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  
Revenue:                                
  Product   $ 62,353     $ 68,516     $ 122,221     $ 164,493  
  Service     22,114       15,667       41,793       31,997  
    Total revenue     84,467       84,183       164,014       196,490  
Cost of revenue:                                
  Cost of product revenue     47,477       39,521       93,047       97,071  
  Cost of service revenue     10,189       10,167       20,017       19,768  
    Total cost of revenue     57,666       49,688       113,064       116,839  
        Gross profit     26,801       34,495       50,950       79,651  
Operating expenses:                                
  Research and development, net     19,968       6,893       40,194       30,643  
  Sales and marketing     11,550       10,233       22,693       18,106  
  General and administrative     5,085       4,971       10,570       10,101  
    Total operating expenses     36,603       22,097       73,457       58,850  
Net gain on sale of interconnect hardware development program     --       139,068       --       139,068  
        Income (loss) from operations     (9,802 )     151,466       (22,507 )     159,869  
Other income (expense), net     145       245       (190 )     465  
Interest income, net     204       37       580       36  
        Income (loss) before income taxes     (9,453 )     151,748       (22,117 )     160,370  
Income tax (expense) benefit     9,303       (4,326 )     14,357       (7,984 )
        Net income (loss)   $ (150 )   $ 147,422     $ (7,760 )   $ 152,386  
                                   
      Basic net income (loss) per common share   $ --     $ 4.05     $ (0.21 )   $ 4.24  
      Diluted net income (loss) per common share   $ --     $ 3.91     $ (0.21 )   $ 4.12  
                                       
      Basic weighted average shares outstanding     37,658       36,367       37,497       35,947  
      Diluted weighted average shares outstanding     37,658       37,682       37,497       36,956  
                                 
                                 
                                 
CRAY INC. AND SUBSIDIARIES  
CONDENSED CONSOLIDATED BALANCE SHEETS  
(In thousands, except share data)  
   
    June 30, 2013     December 31,
2012
 
ASSETS  
Current assets:                
    Cash and cash equivalents   $ 149,146     $ 253,065  
    Short-term investments     91,804       52,563  
    Accounts and other receivables, net     25,137       13,440  
    Inventory     126,199       89,796  
    Prepaid expenses and other current assets     17,634       11,823  
      Total current assets     409,920       420,687  
  Long-term investments     12,242       17,577  
  Property and equipment, net     26,990       25,543  
  Service inventory, net     1,524       1,490  
  Goodwill     14,182       14,182  
  Intangible assets other than goodwill, net     6,829       7,981  
  Deferred tax assets     19,664       10,041  
  Other non-current assets     11,418       12,813  
      TOTAL ASSETS   $ 502,769     $ 510,314  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities:                
    Accounts payable   $ 62,297     $ 34,732  
    Accrued payroll and related expenses     9,162       25,927  
    Other accrued liabilities     4,662       8,616  
    Deferred revenue     48,563       68,060  
      Total current liabilities     124,684       137,335  
  Long-term deferred revenue     37,042       29,254  
  Other non-current liabilities     2,759       3,179  
      TOTAL LIABILITIES     164,485       169,768  
Shareholders' equity:                
  Common stock and additional paid-in capital     582,093       577,938  
  Accumulated other comprehensive income     6,820       5,181  
  Accumulated deficit     (250,629 )     (242,573 )
      TOTAL SHAREHOLDERS' EQUITY     338,284       340,546  
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 502,769     $ 510,314  
                 
                 
                 
CRAY INC. AND SUBSIDIARIES  
Reconciliation of Selected U.S. GAAP Measures to non-GAAP Measures  
GAAP to non-GAAP Net Income  
(Unaudited; in millions except per share amounts and percentages)  
   
        Three Months Ended
June 30,
    Six Months Ended
June 30,
 
        2013     2012     2013     2012  
GAAP Net Income (Loss)       $ (0.2 )   $ 147.4     $ (7.8 )   $ 152.4  
                                     
Non-GAAP adjustments impacting gross profit:                                    
Share-based compensation   (1)     0.1       0.1       0.2       0.2  
  Purchase accounting adjustments   (2)     0.1       --       1.1       --  
  Amortization of acquired and other intangibles   (2)     0.5       --       1.0       --  
Total adjustments impacting gross profit         0.7       0.1       2.3       0.2  
                                     
Non-GAAP gross margin percentage         33 %     41 %     32 %     41 %
                                     
Non-GAAP adjustments impacting operating expenses:                                    
  Share-based compensation   (1)     1.5       1.2       3.1       2.3  
  Amortization of acquired intangibles   (2)     0.1       --       0.2       --  
Total adjustments impacting operating expenses         1.6       1.2       3.3       2.3  
                                     
Gain on sale to Intel   (3)     --       (139.1 )     --       (139.1 )
                                     
Non-GAAP adjustments impacting tax provision:                                    
  Income tax on reconciling items   (4)     0.2       4.7       0.5       4.6  
  Other items impacting tax provision   (5)     (9.3 )     (1.5 )     (13.7 )     1.4  
Total adjustments impacting tax provision         (9.1 )     3.2       (13.2 )     6.0  
                                     
Non-GAAP Net Income (Loss)       $ (7.0 )   $ 12.8     $ (15.4 )   $ 21.8  
                                     
Non-GAAP Net Income (Loss) per common share       $ (0.19 )   $ 0.34     $ (0.41 )   $ 0.59  
                                     
Diluted weighted average shares         37.7       37.7       37.5       37.0  
                                     
Notes
(1) Adjustments to exclude non-cash expenses related to share-based compensation
(2) Adjustments to exclude amortization of acquired intangible assets and other acquisition-related charges related to the acquisition of Appro International, Inc.
(3) Adjustment to exclude gain on divestiture of interconnect hardware development program in Q2 2012
(4) Tax impact associated with reconciling items at non-GAAP tax rate
(5) Adjustments to reflect cash tax impact considering benefits principally related to Cray's net operating loss carryforwards and changes in Cray's valuation allowance held against deferred tax assets
   
   
   
CRAY INC.
Reconciliation of Selected U.S. GAAP Measures to non-GAAP Measures
(Unaudited; in millions, except EPS and percentages)
 
      Three months ended June 30, 2013
      Net Loss     Operating Loss     Diluted EPS     Gross Profit   Gross Margin     Operating Expenses
GAAP     $ (0.2 )   $ (9.8 )   $ --     $ 26.8   32 %   $ 36.6
                                             
Share-based compensation (1)     1.6       1.6       0.04       0.1           1.5
Purchase accounting adjustments (2)     0.1       0.1       --       0.1            
Amortization of acquired intangibles (2)     0.6       0.6       0.02       0.5           0.1
Income tax on reconciling items (3)     0.2               0.01                    
Other items impacting tax provision (4)     (9.3 )             (0.26 )                  
Total reconciling items     $ (6.8 )   $ 2.3     $ (0.19 )   $ 0.7   1 %   $ 1.6
                                             
Non-GAAP     $ (7.0 )   $ (7.5 )   $ (0.19 )   $ 27.5   33 %   $ 35.0
                                             
      Three months ended June 30, 2012
      Net Income     Operating Income     Diluted EPS     Gross Profit   Gross Margin     Operating Expenses
GAAP     $ 147.4     $ 151.5     $ 3.91     $ 34.5   41 %   $ 22.1
                                             
Share-based compensation (1)     1.3       1.3       0.03       0.1           1.2
Gain on Intel sale (5)     (139.1 )     (139.1 )     (3.69 )                  
Income tax on reconciling items (3)     4.7               0.12                    
Other items impacting tax provision (4)     (1.5 )             (0.03 )                  
Total reconciling items     $ (134.6 )   $ (137.8 )   $ (3.57 )   $ 0.1   -- %   $ 1.2
                                             
Non-GAAP     $ 12.8     $ 13.7     $ 0.34     $ 34.6   41 %   $ 20.9
   
Notes 
(1) Adjustments to exclude non-cash expenses related to share-based compensation
(2) Adjustments to exclude amortization of acquired intangible and other intangible assets and other acquisition-related charges related to the acquisition of Appro International, Inc.
(3) Tax impact associated with reconciling items at non-GAAP tax rate
(4) Adjustments to reflect cash tax impact considering benefits principally related to Cray's net operating loss carryforwards and changes in Cray's valuation allowance held against deferred tax assets
(5) Adjustment to exclude gain on divestiture of interconnect hardware development program in Q2 2012
Contact:
Cray Media:
Nick Davis
206/701-2123
pr@cray.com

Investors:
Paul Hiemstra
206/701-2044
ir@cray.com

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