CRAY FY2001 Annual Stockholder's Meeting notes 5/29/02
Just like last year, they held the stockholder's meeting at the company's headquarters. Because of the work they do security is maintained and I went for a walk while waiting for someone to let me in. No problem. They had the room set up for about 120 seats and it was about 75% full. There were more people than that though as many folks were standing in back. Because it was being held in the break room it was hard to see the presentation around the rest of the audience if you sat in back. I could only see about half of the screen so I missed some details. At least I was sitting beside the goodies. They were rich and enticing. Afternoon meetings seem to get dessert goodies instead of the morning meetings that get breakfast goodies.
FORMAL MEETING
In any case things got started just a few minutes late. The CEO ran the show. Within ten minutes he had run through the official meeting including introductions and the voting. Everything passed.
PRESENTATION
History
The CEO started things off with a brief history of CRAY and TERA. He got into a bit of the details concerning the purchase of Cray Research from Silicon Graphics (SGI). The new company's first task was to rebuild the corporate infrastructure necessary to support the Cray products. Most of that work happened in 2000.
In 2001, they focussed more on product development. The success was the ability to ship two MTAs. The downside to the SV1ex delivery was that it was 6 to 9 months late. It sounds like it is doing well though it has not gone out to any new customers. He said there was also great progress in the SV2 development; though I am not sure what that was.
For 2002 there continues to be some activity in selling machines that are 5 or 6 years old (e.g. T90, T3E). But there was also activity in the sales of SV1. I believe the activity in the SX6 will be later this year.
The market was described quickly and generally. The four segments mentioned were earth sciences, bio-informatics, security, and transportation safety. The industry is expected to be flat for 2002.
In product development, the SV2 is to be considered a successor to most of the existing products and it is already time to be thinking about its successor. The product development life has improved from 5 years down to 3 years so if the SV2 is just coming out, then now is the time to start working on the 2005 machines. He had a chart showing the type of performance improvements they are aiming for but I couldn't copy it down in time.
The SX6 is not available for sale to the US government yet. Its Japanese heritage is something of a hurdle they are getting over. There might be some overlap with the SV2 but there is a price differential. I don't know which is pricier. I was curious about this though. If the is in performance but the price is different what advantage is there to the pricier machine? I should have asked that one.
The MTA2 is being directed towards problems of large shared memories akin to the problems being handled by the Naval Research Lab (NRL). I don't know what those problems are. The machine is very compact (each cabinet footprint is 3 foot by 6 foot, and the SV2 footprint is even smaller).
They continue to work with Dell on cluster solutions. Is this just software assistance or is it architecture?
Financially they are borderline profitable and borderline cash flow positive. This is an improvement that they expect to maintain and improve upon as long as they can control costs. They expect about $160M in revenue and an improving backlog. Gross margins are in excess of target but that will probably come down. Old machines have a higher margin and they will be selling newer machines. R&D will come down from over 40% of revenue last year to their goal of 12% to 18%. Currently it is about 30%. The actual number will remain nearly constant but increasing revenues will drive down the percentage. Sales costs and administrative costs were also higher than goal.
At this point the majority of the Cray restructuring is complete.
That concluded the formal part of the presentation. It was only about twenty minutes which seemed short; of course they didn't show any videos this year.
QUESTIONS & ANSWERS
There were quite a few questions. I've paraphrased the exchange between the questioner and the questionee.
> The cash balance is not as good as they would like but their equity needs are very small. As revenue increases and they stay cash flow positive, the cash balance will improve.
> They do sell in other countries but there are some restrictions for the higher end systems. They have representatives in something like 25 countries.
> Boeing caused a ruckus by moving their headquarters out of Seattle. There are some local initiatives to keep local businesses in town. He wasn't aware of all 6 of the efforts but he does believe that CRAY should do more collaborations. The HQ will remain in Seattle and they will continue to hire there too.
> The issue of the CEO who was only there for 5 months and walked with a $1M severance package is the fault of the current CEO and he readily acknowledged that. He thought they needed someone with more experience and didn't get the right person. The severance package was not unusual for a CEO (but it sure would be unusual for a regular employee in any company I know) and will be paid out over a couple of years.
> Strengthening the existing management will be done via On the Job Training.
> The MTA2 managed to meet the benchmark set out for the 40 processor machine using only 16 processors.
> There are over 800 people employed by the company of which about 250 are working the service side of things.
> The competitors are very large (IBM, HP/Compaq, SGI). They tend to use off the shelf microprocessors where CRAY is more custom and has high bandwidth interconnects.
> A very large $100M order is still in play. Most orders are in the $20M - $30M range.
> No one has contacted the company about a buyout. The most companies most interested would be CRAY's competitors. The terms of the purchase from SGI precludes a sale before April 2003.
> Last year there was an assurance that CRAY would not be overlooked by the media. It is still happening. That may continue to happen until CRAY reestablishes itself via products in the field.
> There are still enough problems out there for machines as capable as a CRAY. In addition to the items mentioned in the market description above there is also nuclear stockpile analysis and biological systems (as opposed to the details of genomics and proteonomics).
> They are willing to look at other executive compensation scenarios to avoid the potential earnings hit that a change in the rules can create but they couldn't make any commitments. They like giving the employees and opportunity to become shareholders as it gives them a stake in the company.
That concluded the meeting.
CONCLUSION
In general the meeting was understated compared to last year's meeting. The flat economy leading to a dearth of major sales news probably damped things. The good news is that they are getting products out to the customer and the machines seem to be running fine. I don't know how else to evaluate the total performance besides watching to see who wins the sales and unfortunately lots of those sales to the government are not going to be easy to track. The potential lies out there for government orders and bio-informatics. All of their markets should improve as the economy improves and the machine's performance becomes readily known throughout the folks making purchasing decisions. I also don't know how the timing of the government's budget process affects CRAY sales. All of that suggests that if all goes well, 2003 could be good. On the down side though, there are no guarantees. Other competitors could win the sales, and any initial increase in capital expenditures may not translate into purchases of major systems.
The gentleman sitting beside me at the meeting was convinced of the company's future. To me it sounds fine but there are other companies out there that are also undervalued that at least have larger market shares in growing markets that aren't as saddled with sales restrictions. I think they are a fine company but I might take some or all of my money out and invest elsewhere. I'd like to hear other's opinions but I also know that this board is one of the deadest ones I follow so I (GASP) might have to make up my own mind.
DISCLAIMER
I am an amateur investor and not an expert in current high performance computing. I tend to buy for the long term and have held Cray for about a couple of years now. I bought them based on the potential of the MTA and TERA. Any clarifications or corrections that folks can make are appreciated and when in doubt, contact Investor Relations.
Good luck investing! |
