SOURCE: Cray Inc.

February 15, 2007 16:00 ET

Cray Inc. Reports Fourth Quarter and Full-Year 2006 Financial Results

Company Achieves Solid Fourth Quarter Operating Profit

SEATTLE, WA -- (MARKET WIRE) -- February 15, 2007 -- Global supercomputer leader Cray Inc. (NASDAQ: CRAY) today announced financial results for the fourth quarter and full-year 2006. Total revenue for the fourth quarter was $101.4 million compared to $65.3 million in the prior year period. Net income for the quarter improved significantly to $8.7 million or $0.33 per share compared to a net loss of ($9.2 million) or ($0.42) per share in the fourth quarter of 2005.

Total gross margin for the fourth quarter was 25.4 percent compared to 24.4 percent in the prior year period. Product margin for the fourth quarter was 22.1 percent and included a low margin contract entered into in 2004 of approximately $38 million of product revenue. Service margin for the fourth quarter was 42.1 percent.

Core operating expenses, consisting of research and development (R&D), sales and marketing, and general and administrative (SG&A), were $16.6 million in the fourth quarter compared to $18.3 million in the fourth quarter of 2005. As anticipated, R&D expense was sequentially lower in the fourth quarter, compared to the 2006 third quarter, due primarily to the timing of the Defense Advanced Research Projects Agency's (DARPA) High Productivity Computing Systems Phase III contract, which was signed in the fourth quarter of 2006. SG&A expenses were sequentially higher than the 2006 third quarter due primarily to higher commissions and variable incentive expense.

Fourth quarter income from operations was $9.2 million compared to a loss from operations in the prior year period of ($9.2 million). Included in fourth quarter 2006 results from operations were non-cash items of $0.6 million related to stock compensation and $3.5 million for depreciation and amortization.

For the year 2006, Cray reported improved results throughout the income statement, with revenue of $221 million and a net loss of ($12.1 million) or ($0.53) per share compared to $201 million and net loss of ($64.3 million) or ($2.91) per share in 2005. Total gross margin for 2006 improved to 28.9 percent compared to 16.2 percent in 2005, while core operating expenses declined to $69.8 million from $83.7 million in 2005. Loss from operations declined significantly to ($7.2 million) in 2006 compared to ($60.9 million) in 2005. Included in 2006 results were non-cash items of $2.1 million related to stock compensation and $16.2 million for depreciation and amortization.

Cash balances as of December 31, 2006 were $140.3 million compared to $44.2 million reported as of September 30, 2006 and $46.0 million reported as of December 31, 2005. The improvement in cash was driven primarily by positive operating cash flow for the year along with the successful completion of a common stock offering, which provided net proceeds of approximately $81.3 million.

"2006 was a defining year for Cray, culminating with a handful of very important milestones completed in the fourth quarter, including a $250 million contract with DARPA that is expected to co-fund Cray's core product roadmap through the end of the decade; an $81 million common stock offering that will provide the capital necessary to fund Cray's growth opportunities; the introduction of two new Cray supercomputers; and, importantly, a return to profitability," said Peter Ungaro, president and CEO of Cray. "Eighteen months ago we built a roadmap to return to supercomputing leadership and sustained profitability and, without a doubt, we made great strides toward both of those goals. Our DARPA win and the world's first contract to build a petascale supercomputer at the Department of Energy's Oak Ridge National Laboratory made 2006 one of the most successful contracts and bookings years in the company's history."

Outlook

While there continues to be a wide range of potential outcomes, Cray estimates total revenue of $230 million to $260 million for 2007. The company believes revenue for the first quarter will be in the range of 20 percent of anticipated annual revenue, though quarterly results are likely to fluctuate significantly. Cray expects improved gross margins for 2007 and anticipates core operating expenses to be modestly higher than in 2006. Within the target revenue range, the company anticipates 2007 operating income of approximately 3 to 7 percent of revenue, including about $3 million of anticipated non-cash stock compensation expense. Assuming target profitability for the year, the company anticipates a diluted share count of roughly 33 million shares at year-end, though quarterly and annual share counts will be affected by operational results and are subject to many variables.

Quarterly and annual results for 2007 will be affected by the timing and success of the Cray XT4™, Cray XMT™ and "BlackWidow" product rollouts. The Cray XT4 system is currently available, with a future upgrade planned for later in 2007, while the Cray XMT and BlackWidow systems are not expected to reach general availability until late in 2007. Also affecting 2007 quarterly and annual results will be the level and timing of government funding as well as the timing of customer orders, acceptances and associated revenue recognition.

Recent Highlights

--  Today, February 15, Cray announced an $85 million contract to deliver
    a massively parallel processing hybrid supercomputer that will be the
    centerpiece in the UK Engineering and Physical Sciences Research Council's
    (EPSRC) 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.  The level and timing of 2007 revenue
    recognition for this contract is currently uncertain.
    
--  In January 2007, Cray announced a multi-phase contract with the U.S.
    Army Engineer Research and Development Center to upgrade their 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
    the nation's armed forces.
    
--  In the fourth quarter of 2006, Sandia National Laboratories and
    Pittsburgh Supercomputing Center (PSC) both upgraded their existing Cray
    XT3 supercomputers. Sandia's upgrade boosted performance on their system to
    over 100 teraflops, making it the second most powerful supercomputer in the
    world as of November 2006 (see www.top500.org). With over a two-fold
    increase in performance, PSC's upgrade provides for a significant increase
    to the most oversubscribed resource on the National Science Foundation's
    TeraGrid computing infrastructure.
    
--  In November, Cray announced a $250 million multi-year agreement with
    DARPA to develop a revolutionary new supercomputer based on Cray's Adaptive
    Supercomputing vision. Over the course of the contract, Cray will
    incorporate elements of the program into commercially available products,
    the first of which is targeted for availability in 2009.
    
--  In November, Cray was awarded the HPCwire Editors' Choice Award as the
    "Top HPC Vendor" for 2006. The Editors' Choice Award is determined by votes
    of an advisory group and alumni panel of recognized luminaries,
    contributors and editors associated with HPCwire, a leading source of news
    and information about the global HPC industry.
    
--  In November, Cray announced two new products: the Cray XT4 and Cray
    XMT supercomputers. The Cray XT4, a scalar-based supercomputer and
    descendant of the Cray XT3 system, began shipping in the fourth quarter of
    2006. The Cray XMT, a massively multithreaded processing platform that can
    deliver over 1 million concurrent processing threads in a single system, is
    anticipated for general availability in late 2007.
    
--  In December, Cray completed a public offering of 8,625,000 shares of
    common stock at a price of $10.00 per share. The company received net
    proceeds of approximately $81.3 million. The company intends to use the
    proceeds to fund working capital and for general corporate purposes,
    including product development and capital expenditures.
    
Conference Call Information

Cray will host a conference call today, Thursday, February 15, 2007 at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to discuss fourth quarter 2006 and full-year financial results. To access the call, please dial into the conference at least 10 minutes prior to the beginning of the call at 1-800-218-0204. 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 or to www.streetevents.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 11084264. International callers can listen to the replay by dialing 303-590-3000, access code 11084264. The conference call replay will be available for 72 hours, beginning at 4:30 p.m. Pacific Time on Thursday, February 15, 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; 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 success 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 most recent Quarterly Report on Form 10-Q filed with the SEC.

Cray is a registered trademark, and Cray XT3, Cray XT4 and Cray XMT 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          Year Ended
                                    December 31,          December 31,
                                  2005       2006       2005       2006
                                ---------  ---------  ---------  ---------

REVENUE:
   Product                      $  52,302  $  84,805  $ 152,098  $ 162,795
   Service                         12,955     16,619     48,953     58,222
                                ---------  ---------  ---------  ---------

      Total revenue                65,257    101,424    201,051    221,017
                                ---------  ---------  ---------  ---------


OPERATING EXPENSES:
   Cost of product revenue         42,951     66,025    139,518    124,728
   Cost of service revenue          6,380      9,630     29,032     32,466
   Research and development,
    net                             8,780      5,764     41,711     29,042
   Sales and marketing              5,857      6,386     25,808     21,977
   General and administrative       3,654      4,457     16,145     18,785
   Restructuring, severance and
    impairment                      6,817        (39)     9,750      1,251
                                ---------  ---------  ---------  ---------

      Total operating expenses     74,439     92,223    261,964    228,249
                                ---------  ---------  ---------  ---------

      Income (loss) from
       operations                  (9,182)     9,201    (60,913)    (7,232)

Other expense, net                   (819)      (177)    (1,421)    (2,141)

Interest expense, net              (1,142)      (438)    (3,462)    (2,095)
                                ---------  ---------  ---------  ---------

      Income (loss) before
       income taxes               (11,143)     8,586    (65,796)   (11,468)

Income tax expense (benefit)       (1,916)      (146)    (1,488)       602
                                ---------  ---------  ---------  ---------

      Net income (loss)         $  (9,227) $   8,732  $ (64,308) $ (12,070)
                                =========  =========  =========  =========


      Diluted net income (loss)
       per common share         $   (0.42) $    0.33  $   (2.91) $   (0.53)
                                =========  =========  =========  =========

      Diluted weighted average
       shares outstanding          22,207     28,971     22,125     22,849
                                =========  =========  =========  =========


* For the quarter ending December 31, 2006, diluted earnings per share
includes the impact of applying the "if converted" method on the Company's
convertible notes payable.  Accordingly, interest expense of $770,000 has
been added back to net income to calculate diluted net income per share.



                        CRAY INC. AND SUBSIDIARIES

                  CONDENSED CONSOLIDATED BALANCE SHEETS
              (Unaudited and in thousands, except share data)


                                                  December 31, December 31,
                                                      2005         2006
                                                  -----------  -----------
ASSETS
Current assets:
   Cash and cash equivalents                      $    46,026  $   115,328
   Restricted cash                                          -       25,000
   Accounts receivable, net                            55,064       44,790
   Inventory                                           67,712       58,798
   Prepaid expenses and other current assets            2,909        2,156
                                                  -----------  -----------
      Total current assets                            171,711      246,072

Property and equipment, net                            31,292       21,564
Service inventory, net                                  3,285        4,292
Goodwill                                               56,839       57,138
Deferred tax asset                                        575          722
Intangible assets, net                                  1,113        1,404
Other non-current assets                                8,190        6,311
                                                  -----------  -----------
      TOTAL ASSETS                                $   273,005  $   337,503
                                                  ===========  ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                               $    14,911  $    22,450
   Accrued payroll and related expenses                12,145       17,411
   Advance research and development payments            1,538       21,518
   Other accrued liabilities                            9,164        5,121
   Deferred revenue                                    81,749       43,248
                                                  -----------  -----------
      Total current liabilities                       119,507      109,748

Long-term deferred revenue                              5,234        2,475
Other non-current liabilities                           2,317        3,906
Convertible notes payable                              80,000       80,000
                                                  -----------  -----------
      TOTAL LIABILITIES                               207,058      196,129

Shareholders'  equity:
   Common stock                                       422,691      507,356
   Exchangeable shares                                    576            -
   Deferred compensation                               (2,811)           -
   Accumulated other comprehensive income               6,258        6,855
   Accumulated deficit                               (360,767)    (372,837)
                                                  -----------  -----------
      TOTAL SHAREHOLDERS' EQUITY                       65,947      141,374
                                                  -----------  -----------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $   273,005  $   337,503
                                                  ===========  ===========

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