4th Quarter Conference Call Summary:
Here are what I see as the major points in the conference call as well as some editorial comments. If you want the details, read the actual notes below. They made two significant changes. First, instead of tracking by product, they've lumped everything into either Graphics Products or Server Products. Second, they stated that they are no longer going to discuss corporate vision and strategies in the conference call.
As usual I tried to be as accurate as possible and had to rewind the call several times in some cases to get the numbers. But I wouldn't be surprised if somebody finds an error or two. I've listed these in what I see as the order of significance to investors.
1. The entire new product line was shipping during the quarter. They expect to be in the "sweet spot" of the cycle this year. Transition is over!
2. As I stated over a year ago on this thread, the future of SGI is in high-end servers for applications such as database and other information services such as internet commerce. This is playing out as roughly half the revenues for the quarter and year were from the nongraphics server business. O2000 is the fastest growing product with key growth in Internet Commerce and telecommunications areas. Revenues grew 30% sequentially.
3. They are putting a lot of effort into improving business processes. This is a significant step and will lead to long term growth, higher margins, and lower inventories. If they execute properly, it is what will make SGI more cost competitive. This is one of the reasons why Sun does so well. They are seeing some benefit now but expect it to take about two years to be complete.
4. Gross margins are already back up to almost 50% which is pretty darn good. Net margins are expected to be 10% for all of 1998. Revenue and earnings rowth is expected in the "mid teens". I think these are very conservative numbers. I think they've learned their lessons to not surprise on the downside.
5. They are working down inventory to an expected $300M-$500M long-term level. Most of the inventory is in the high-end products which are higher dollar/lower volume.
6. O2 is becoming less competitive against Unix and NT competitors but they will make performance upgrades in `98 to remain competitive.
7. Graphics systems sales grew by over 30% sequentially indicating great acceptance of the products.
8. It is assumed at this point the SGI is coming out with an NT graphics product. SGI no longer denies it and analysts spoke of it "matter of fact"ly. No product announcement yet. [Vincent Bilotta- nice call on this one a few months back!]
9. They are going to work more closely with the investment community. They will be holding periodic meetings at SGI and other investment conferences to discuss the vision of the company. The first one is scheduled for 9/5/97.
Silicon Graphics Conference Call notes
4th quarter
Earnings reported 7/24/97
J. Maresh
9/5 First meeting at SGI for analysts to discuss corporate strategies. They will also appear investor conferences.
Bill Kelly - CFO
4th qtr 1.2B 19% higher than year ago, 28% higher than last quarter - company record
700M backlog at beginning of quarter, goal was to reduce backlog
High lights:
1. Product transition complete, all products delivering in volume
2. Octane shipments was big success. Desktop is alive and well.
3. Origin 2000 fastest growing product category. It is competitive
4. Focus on Business processes is paying off
Review by category
Servers - Origin 200 and 2000, Cray products, power challenge
Revenues grew 30% sequentially
52% of revenue for Q4
49% of revenue for year
Enterprise growth strong - ISP and data warehousing is hot area
Rev growth for T90/T3E was strong
Graphics systems - O2, Octane, Onyx 2, Indy, Indigo 2, Alias/WF software
weak in Q3, Roared back in Q4
Grew >30% sequentially
48% of revenue Q4
51% for year
Octane shipped successfully in full volume in Q4. Product is competitive.
CAD and science markets are strong. Good momentum going into 98
O2 drives unit growth. Competing well against NT
Revenue down because of Octane competition and NT competition
O2 is competitive
Performance will be enhanced in 98
Graphics business declined in 97 because of product transtion issues and weak graphics market
SGI held their own in terms of market share. Will grow share in 98
Alias/Wavefront
Best quarter in history
Hot in automotive industries
Geographical
US. 57% of revenue - extremely strong
Europe - 25%
Pacific - 18%
US rev grew 32% year over year, 48% sequentially
Europe down 3% in US dollars, up 3% in local currencies year-over-year. 21% sequential growth in US dollars, 23% in local dollars. Europe should be emerging from recession. Business has been tough for the past year.
Pacific - Grew 20% in US dollars, 25% in local currencies year over year. Sequentially, down 5% in US $, 7% in local currencies reflecting buying pattern of Japanese govt.
Gross margin 49%, up 5.5% sequentially, 4.7% year over year. Getting back to normal margin territory. Product mix weighted towards higher end.
Op expenses up $44M seq due to increase in sales commissions and increase in marketing costs.
Expenses were in line with expectations. Year over year - flat as a percentage of revenue
Net income $102M vs. -$49M year over year due to Cray acq
EPS 0.56 vs. -0.36 year over year
Annuallized revenue/employee was $425K - highest in history. 10,930 employees - same as last quarter.
Backlog - Objective was to work down $700M backlog. Backlog was reduced $172M over the quarter. Total now is $537M. BTB was 0.84. Over 300M is shippable during Q1. Normal backlog is $300M-$500M expected soon.
Business process improvements - forecasting, order admin, A/R. Redesigning system to handle "quote to collect" cycle. Still building system to do this. They have made progress in shipping more product during the 1st two months of the quarter vs. Shipping most during last month of quarter. 1/3 of quarter shipped in first 2 months. They are pleased with progress.
Balance sheet - $333M cash net of debt vs. $411M in last quarter. They are working to better manage inventory and A/R. Inventory was $628M down $46M but too high. Inventory turns was 3.8 and should be improved. A/R management needs improvement too. Expect increases in cash in `98
Outlook - Expect to grow in mid teens. Moving into favorable part of product cycle. Enterprise growth is expected. Expect gains in Unix workstation market. Technical servers (Cray) will grow less than overall corporate rate. Q1 is usually a down quarter because of seasonal buying reasons. Because of a strong Q4, dip may be greater than the usual 10% usually experienced. Expecting 15% year over year growth. 49% gross margin is where they plan to be in 98. 45% in 97. Expect op margin to be 10% for entire fy 98. Q1 target is lower. Tax rate 26%.
Will finish acquistion of Paragraph during Q1. Part of Cosmos software business. $20M one-time charge expected.
Questions:
What is their NT strategy? Will be discussed on 9/5 meeting. Not religious on OS subject. Commitment is to be #1 professional workstation market in the world. Investigating NT marketspace. They don't expect NT product to have a meaningful impact on results. Nothing to announce.
How can O2 be livened up to compete better with 10K NT workstations? Performance on O2 will be improved to be more competitive. Highest volume product already in history of company. Facing significant competition from NT and other competitors. But they expect to improve enough to continue to grow marketshare.
How can we be sure that transition problems are over with? "Quote to collect" is still being worked on. May take a couple of years to be fully integrated. No illusions it's an overnight process.
Government orders were strong for high-end servers for the quarter
Manufacturing orders were also very strong for the quarter
Issues of R10K processor performance since R12K not due out for a few quarters yet. What are key investment areas now. Speed upgrades in store for R10K. MIPS roadmap will be discussed on 9/4 in detail.
Process improvement is a major focus at this point. Strategically, server business is the strongest growing area. Throwing resources at that area. Telecom should be fastest growing segment. All web related businesses receiving significant investment including Paragraph.
Comments on thrust into enterprise server market. They are seeing success making inroads into this market including database. Also streaming video. They have a differentiated product. New markets that are small and growing at extremely fast rates.
Nintendo - pure profit business. It's expected to be a "9-figure" contributor to revenue over the next 2 or 3 years.
O2 inventories - no buildup in channel. O2 turns are higher than company average. The production process is well-tuned at this point. Inventory issue is in high-end because of complexity and volume of machines shipped.
Server vs. Enterprise computing market issues - They will continue to grow in the workstation maket but also work on selling high-end servers. They want to be the #1 company worldwide for desktop professional workstations in light of competition from other Unix vendors and NT. Server business is expected to grow rapidly.
They are working on better forecasting to lower inventories. The number of product variants is being reduced. Working with marketing folks to deliver more accurate forecasts.
They don't plan to hire much in 1998 but they are moving people around in the company to focus on the higher growth products.
Origin sells into two different markets: technical and enterprise computing. Technical - 16-24 processors/system is typical now. Enterprise - growth in internet and telecom which is fastest growing market.
Product transition from R10K to R12K will happen this year. It will not be as traumatic as the most recent transition. Octane and Origin moving into sweet spot of product cycle.
Direct business and channel business was split about 50/50.
ISP/Telecom business both growing very rapidly. Media distribution also growing. |
