SOURCE: Cray Inc.

May 03, 2007 16:00 ET

Cray Inc. Reports First Quarter 2007 Financial Results

Company Continues Operating and Bottom-Line Improvements

SEATTLE, WA -- (MARKET WIRE) -- May 3, 2007 -- Global supercomputer leader Cray Inc. (NASDAQ: CRAY) today announced financial results for the first quarter ended March 31, 2007. Total revenue for the quarter was $47.1 million compared to $48.5 million in the prior year period. Net loss for the quarter improved to ($0.8 million) or ($0.03) per share compared to a net loss of ($5.3 million) or ($0.24) per share in the first quarter of 2006.

Total gross margin for the first quarter of 2007 was 33.0 percent compared to 29.2 percent in the prior year period. Product margin for the first quarter was 30.0 percent compared to 22.2 percent in the first quarter of 2006. The product margin improvement occurred primarily as a result of increased higher margin core product revenue and a decrease in low margin research and development related project revenue. Service margin for the first quarter returned to a more normalized level at 40.5 percent compared to 46.0 percent in the first quarter of 2006, which was buoyed by a high-margin technical services contract.

Operating expenses were $17.4 million in the first quarter compared to $18.5 million in the prior year period. Operating expenses in the prior year period included about $700,000 related to restructuring and severance.

Included in first quarter 2007 results were non-cash items of $3.5 million for depreciation and amortization and $1.0 million related to stock compensation.

Cash and short-term investment balances as of March 31, 2007 were $147.6 million compared to $140.3 million reported as of December 31, 2006.

"We had a solid first quarter on the revenue line and demonstrated continued progress throughout the income statement. On the sales side, we had a strong bookings quarter, driven primarily by two important customer wins in Europe and included bookings across all three product lines, including the planned BlackWidow and Cray XMT™ systems," said Peter Ungaro, president and CEO of Cray.

Outlook

Quarterly and annual results for 2007 will be affected by many factors, including the timing and success of the Cray XT4™ and "BlackWidow" product rollouts. The Cray XT4 system is currently available and shipping, with an important upgrade to a quad-core Opteron processor from AMD planned in late 2007. Planned ASIC re-spins for the BlackWidow and Cray XMT™ systems will likely result in initial BlackWidow deliveries in late 2007 and initial Cray XMT system deliveries in 2008. These changes in the anticipated timing of product availability have impacted the company's outlook for 2007.

While there continues to be a wide range of potential outcomes for quarterly and annual results, Cray now estimates the mid-point for the 2007 revenue range to be about $230 million. This estimate assumes a significant contribution from quad-core Cray XT4 systems and upgrades, as well as a contribution from initial BlackWidow sales. The company anticipates as much as 50% of full-year product revenue could be recognized in the fourth quarter, while second and third quarter results are expected to be mixed, with the third quarter likely benefiting from a very large product acceptance of about $40 million and the second quarter potentially having minimal product revenue. Cray continues to expect improved gross margins for 2007, modestly higher operating expenses compared to 2006 and profitability for the year.

"We are clearly disappointed with the impact of the re-spins on our 2007 outlook, particularly so given the progress made over the past two years," stated Peter Ungaro. "We are actively working to further improve development and other business processes, continuing to add capability and breadth to our product portfolio. We remain very positive about the opportunities we see ahead."

Recent Highlights

--  In April, Cray announced an order that will nearly triple the
    capability of the Swiss National Supercomputing Centre's (CSCS) Cray
    XT3™ system from 8.5 teraflops (trillion floating point operations per
    second) to 22.8 teraflops.  The upgrade will be achieved in two phases:
    first, the existing system will be upgraded with dual-core AMD Opteron
    processors, which will be followed by the installation of a fully
    compatible Cray XT4 supercomputer planned for late 2007.  The existing Cray
    XT3 system began operational weather forecasting in support of MeteoSwiss
    in February 2007.
    
--  In April, Cray announced completion of the Department of Energy's Oak
    Ridge National Laboratory's Cray XT3/XT4 system upgrade to 119 teraflops.
    The system continues to be one of the world's most powerful supercomputers,
    dedicated to advancing the frontiers of neutron science, biological
    systems, energy production, advance materials and other groundbreaking
    science.
    
--  In February, Cray announced an $85 million multi-year contract to
    deliver a massively parallel processing hybrid supercomputer that will be
    the centerpiece in the UK Engineering and Physical Sciences Research
    Council's High End Computing Terascale Resources (HECToR) project.  The
    Cray system, which will leverage the Cray XT4 platform, along with planned
    BlackWidow and Baker systems, will serve as the next generation high
    performance computing resource for the UK academic community.  The initial
    installation for this multi-phase project is currently scheduled to begin
    in the third quarter of 2007.
    
--  In January, Cray announced a multi-phase contract with the U.S. Army
    Engineer Research and Development Center to upgrade its existing Cray XT3
    supercomputer and install a new Cray XT4 supercomputer.  The two systems
    will provide a six-fold increase in processing power, with a combined peak
    performance of over 120 teraflops, to be used in support of various
    missions of the nation's armed forces.
    
Conference Call Information

Cray will host a conference call today, Thursday, May 3, 2007 at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss first quarter 2007 financial results. To access the call, please dial into the conference at least 10 minutes prior to the beginning of the call at 1-866-250-2351. International callers should dial 303-275-2170. To listen to the live 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. If you do not have Internet access, a replay of the call will be available by dialing 1-800-405-2236 and entering access code 11089103. International callers can listen to the replay by dialing 303-590-3000, access code 11089103. The conference call replay will be available for 72 hours, beginning at 4:30 p.m. Pacific Time on Thursday, May 3, 2007.

About Cray Inc.

As a global leader in supercomputing, Cray provides highly advanced supercomputers and world-class services and support to government, industry and academia. Cray technology enables scientists and engineers to achieve remarkable breakthroughs by accelerating performance, improving efficiency and extending the capabilities of their most demanding applications. Cray's Adaptive Supercomputing vision will result in 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. There are certain factors that could cause Cray's execution to differ materially from those anticipated by the statements above. These factors include anticipated revenue subject to complex revenue recognition rules; fluctuating quarterly operating results; lower margins and operating results due to many variables including pricing pressure; the technical challenges of developing high performance computing systems, including potential delays in development projects, such as the quad-core Cray XT4, Cray XMT and BlackWidow systems; the timing and level of government funding for supercomputer system purchases and research and development activities; the successful passing of customer acceptance tests; reliance on third-party suppliers including their competitiveness with other suppliers and potential delays in availability of qualified parts from suppliers; the successful porting of application programs to Cray computer systems; Cray's ability to keep up with rapid technological change; Cray's ability to compete against larger, more established companies and innovative competitors; and general economic and market conditions. For a discussion of these and other risks, see "Risk Factors" in Cray's 2006 Annual Report on Form 10-K filed with the SEC.

Cray is a registered trademark, and Cray XT4, Cray XMT and Cray XT3 are trademarks of Cray Inc. All other trademarks are the property of their respective owners.

                        CRAY INC. AND SUBSIDIARIES

              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
            (Unaudited and in thousands, except per share data)



                                                          Quarter Ended
                                                             March 31,
                                                          2007      2006
                                                        --------  --------

REVENUE:
  Product                                               $ 33,660  $ 34,269
  Service                                                 13,449    14,246
                                                        --------  --------
     Total revenue                                        47,109    48,515
                                                        --------  --------

COST OF REVENUE:
  Cost of product revenue                                 23,577    26,677
  Cost of service revenue                                  7,998     7,693
                                                        --------  --------
     Total cost of revenue                                31,575    34,370
                                                        --------  --------
     Gross margin                                         15,534    14,145
                                                        --------  --------

OPERATING EXPENSES:
  Research and development, net                            7,880     7,215
  Sales and marketing                                      5,268     4,985
  General and administrative                               4,280     5,594
  Restructuring and severance                                 10       738
                                                        --------  --------
    Total operating expenses                              17,438    18,532
                                                        --------  --------

    Loss from operations                                  (1,904)   (4,387)

Other income (expense), net                                  395       (41)

Interest income (expense), net                             1,033      (608)
                                                        --------  --------

    Loss before income taxes                                (476)   (5,036)

Income tax expense                                          (365)     (269)
                                                        --------  --------

    Net loss                                            $   (841) $ (5,305)
                                                        ========  ========

   Diluted net loss per common share                    $  (0.03) $  (0.24)
                                                        ========  ========

   Diluted weighted average shares outstanding            31,484    22,338
                                                        ========  ========


                        CRAY INC. AND SUBSIDIARIES

                  CONDENSED CONSOLIDATED BALANCE SHEETS
                       (Unaudited and in thousands)

                                                     March 31, December 31,
                                                        2007       2006
                                                      ---------  ---------
                       ASSETS
Current assets:
   Cash and cash equivalents                          $  91,089  $ 115,328
   Restricted cash                                       25,000     25,000
   Short term investments, available-for-sale            31,488          -
   Accounts receivable, net                              25,733     44,790
   Inventory                                             53,960     58,798
   Prepaid expenses and other current assets              3,368      2,156
                                                      ---------  ---------
          Total current assets                          230,638    246,072

Property and equipment, net                              19,209     21,564
Service inventory, net                                    4,119      4,292
Goodwill                                                 57,521     57,138
Deferred tax asset                                          746        722
Intangible assets, net                                    1,380      1,404
Other non-current assets                                  6,069      6,311
                                                      ---------  ---------
          TOTAL ASSETS                                $ 319,682  $ 337,503
                                                      =========  =========

        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                   $  15,634  $  22,450
   Accrued payroll and related expenses                  10,464     17,411
   Advance research and development payments             15,474     21,518
   Other accrued liabilities                              9,521      5,121
   Deferred revenue                                      39,912     43,248
                                                      ---------  ---------
          Total current liabilities                      91,005    109,748

Long-term deferred revenue                                2,069      2,475
Other non-current liabilities                             3,474      3,906
Convertible notes payable                                80,000     80,000
                                                      ---------  ---------
          TOTAL LIABILITIES                             176,548    196,129

Shareholders'  equity:
   Common stock                                         509,900    507,356
   Accumulated other comprehensive income                 6,912      6,855
   Accumulated deficit                                 (373,678)  (372,837)
                                                      ---------  ---------
          TOTAL SHAREHOLDERS' EQUITY                    143,134    141,374
                                                      ---------  ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $ 319,682  $ 337,503
                                                      =========  =========

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