Mind the GAAP

By John West

February 9, 2009

SGI announced earnings for its second fiscal quarter (FY2009) last Thursday, reporting lower revenue and higher losses when compared with Q1, and citing the tough economic climate as a primary cause. As has been the case with many of its recent earnings announcements, the company reported both figures created according to Generally Accepted Accounting Principles (or GAAP results), and non-GAAP results. HPCwire had a chance to talk with SGI Chief Financial Officer Greg Wood after the earnings call, and he walked us through the company’s financial results and explained to us why non-GAAP measures are important, and meaningful indications of the company’s performance.

SGI’s financial results from the second fiscal quarter (ended Dec. 26, 2008) didn’t have the company popping champagne corks at its Sunnyvale, Calif., headquarters.

Revenue for the second quarter was $82.8 million, compared to $92.8 million in the previous quarter and $90.1 million in the second quarter of the prior year. The company’s net loss for the quarter was $49.2 million, or $4.24 per share, versus a net loss of $33.7 million or $2.91 per share last quarter and $42.2 million or $3.78 per share in the second quarter of the prior year.

During the earnings call, company CEO Bo Ewald talked about the challenging financial climate during the quarter and its effect on some of its core markets. SGI’s media customers were feeling pressure from dropping revenues as their clients pulled back on air time for splashy advertising campaigns, and business from the federal customers slowed from what SGI reckons as the impact of a continuing resolution and the uncertainty surrounding the new administration.

Despite the dismal business climate, the company did report an increase of $10 million in bookings during the quarter, rising from $58 million in Q1 to $68 million. Ewald characterized these bookings as fairly broad-based: there were no large deals in that figure, with largest orders being at most in the $6-7 million range. 18 of the top 20 orders were with from the government or from government-funded customers, with the last two being million dollar orders for storage from the media sector and (interestingly) SGI’s new visualization offering in the aerospace sector.

Ewald did mention that the company is working on a large deal that didn’t close in time for Q2, but which it expects to be announcing soon. CFO Greg Wood ascribed SGI’s decrease in margin during this quarter (down to 26 percent from 32 percent in Q1) to a draw down of the company’s cash reserves in order to service this deal, and to adverse foreign exchange rate impacts. As the company moves forward, Ewald described the company’s strategy to grow the business around its Industrial Strength Linux Environment (ISLE), the visualization offering, and its new Ultraviolet compute platform.

Digging into the results a little further, operating expenses for Q2 were down from Q1, reflecting savings from a Q1 headcount reduction. SGI started this fiscal year with 1,632 employees, and during Q1 eliminated 75 positions. Additional headcount reductions of 270 or so following an additional restructuring in December have brought SGI staff down to 1,287 today. The Q2 results include the charge for that action (termination of leases, employee severance packages, and so on) but not the benefits, which Wood estimated on the earnings call will be about $30 million annually.

Wood and Ewald also discussed an agreement SGI reached with creditors in December to delay repayment of outstanding debts, which had been due to enter repayment at the end of last year. While they noted that this was a positive outcome for the business in the short term, both Wood and Ewald touched on their goal to achieve a comprehensive restructuring of the company’s debt moving forward.

As has been the case with all recent earnings announcements, SGI also highlighted non-GAAP results during the call.

Pro forma revenue, a non-GAAP measure, for the second quarter was $89.3 million, compared to $117.5 million in the previous quarter and $109.1 million in the second quarter of the prior year. Pro forma revenue excludes the effect of Statement of Accounting Position 97-2, which requires the deferral of revenue in certain circumstances under software revenue recognition rules and is useful when considered in connection with revenue as calculated under GAAP.

I’m an engineer, not an accountant, which means that I’m curious enough to look up what GAAP stands for, and to be suspicious when someone reports non-GAAP results. So, what gives? I talked with Greg Wood following the earnings call to try and get a handle on what’s going on here.

First, a little background. GAAP stands for Generally Accepted Accounting Principles, and we’ll make a quick trip to the Wikipedia for a definition

Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called “Generally Accepted Accounting Principles” (GAAP).

Exactly what the principles are is contained in a body of documentation called the International Financial Reporting Standards (IFRS), which is established and maintained by the International Accounting Standards Board.

The part of this body of information that affects SGI is called Statement of Position 97-2 “Revenue Recognition of Software Products.” Issued in 1997, 97-2 governs how companies that provide software products as a significant part of the value of their solution “recognize” (or report) the revenue from those sales. The rule says that if you don’t have a generally recognized and relatively invariant process by which you price the various elements of a solution that includes significant value from software, you cannot recognize the full revenue from the sale until the end of the delivery period. Huh?

OK, an example. Consider that you buy a $50 million storage solution from SGI, which includes both hardware (tapes, disks, servers, etc.) and software (DMF, CXFS, and so on) as well as a four year maintenance agreement. You install the solution, run it for 30 days during which it performs fine and you write SGI a check for $50 million. Now the maintenance period begins, and each month you write SGI a check for the service portion of your contract. So SGI has a check for $50 million from you, which they have put in the bank and are free to spend. But at the end of the quarter they have to make a determination about whether they can report that $50 million as income. The answer lies in whether 97-2 applies.

From an accounting point of view you cannot use the hardware you bought without the storage software that came with it, so the software is a significant part of the value of the solution. Therefore, 97-2 applies and even though they have definitely deposited your $50 million check and can use it in the daily operation of the business, they cannot report the income in that quarter’s results. Pretty non-intuitive, which is probably why I’m not an accountant.

So how do they get to report the income? In this case SGI would recognize both the monthly money from the service contract in the quarters in which it occurs and a pro-rated portion of the purchase price of the hardware. In our example we have a four year service contract, so each month SGI would recognize (which means report as part of that period’s earnings) 1/48 of $50 million.

Why is this such a big deal? The problem is that SGI wasn’t always considered (for accounting purposes) a software company. For most of its history it was a hardware company, and 97-2 didn’t apply to its sales. Starting a couple of years ago, SGI’s auditors determined that the software really was an important part of SGI’s solutions, and this meant that the company suddenly had to start pushing revenue forward in its reporting statements. This had the effect of the appearance of a dramatic revenue decrease, at least in the short term.

But SGI still has the money today from these deals as customers accept hardware, even though it can only report it gradually over time. So, if you look at only the GAAP results, it’s hard to tell how much money the company actually has in the bank. Enter the non-GAAP, or pro forma, revenue results in this quarter’s results press release. The pro forma results are higher, and offer an indication of money they put in the bank this quarter and have on hand to run the business.

Does all of this mean that SGI is really a fabulously-healthy company and the mean old accountants are forcing them to look bad? No. Q2 pro forma (non-GAAP) revenue was $89.3 million, only about $6.5 million more than the GAAP revenue. The company is still in a challenging business position, and really does have its work cut out for it. But reporting non-GAAP results also doesn’t mean that the company is playing around with the numbers and trying to hide something. Both GAAP and non-GAAP results are important, and both should be studied to get an accurate picture of the health of the business.

The good news is that SGI likely won’t always face these challenges. There are a set of tests related to pricing of services and software that, if passed, will enable SGI to recognize hardware revenue after a system is accepted rather than having to amortize it over, say, the life of a multi-year service contract. This will have the effect of SGI being able to report its income closer to how you’d think of reporting income for your family — when did you get a check, and how much was it for. How long will it take for SGI to be able to establish new business practices that will enable it to pass these tests? “I’d love to get there by the beginning of the next fiscal year,” says Wood. “But that may be challenging.”

Subscribe to HPCwire's Weekly Update!

Be the most informed person in the room! Stay ahead of the tech trends with industry updates delivered to you every week!

MLPerf Inference 4.0 Results Showcase GenAI; Nvidia Still Dominates

March 28, 2024

There were no startling surprises in the latest MLPerf Inference benchmark (4.0) results released yesterday. Two new workloads — Llama 2 and Stable Diffusion XL — were added to the benchmark suite as MLPerf continues Read more…

Q&A with Nvidia’s Chief of DGX Systems on the DGX-GB200 Rack-scale System

March 27, 2024

Pictures of Nvidia's new flagship mega-server, the DGX GB200, on the GTC show floor got favorable reactions on social media for the sheer amount of computing power it brings to artificial intelligence.  Nvidia's DGX Read more…

Call for Participation in Workshop on Potential NSF CISE Quantum Initiative

March 26, 2024

Editor’s Note: Next month there will be a workshop to discuss what a quantum initiative led by NSF’s Computer, Information Science and Engineering (CISE) directorate could entail. The details are posted below in a Ca Read more…

Waseda U. Researchers Reports New Quantum Algorithm for Speeding Optimization

March 25, 2024

Optimization problems cover a wide range of applications and are often cited as good candidates for quantum computing. However, the execution time for constrained combinatorial optimization applications on quantum device Read more…

NVLink: Faster Interconnects and Switches to Help Relieve Data Bottlenecks

March 25, 2024

Nvidia’s new Blackwell architecture may have stolen the show this week at the GPU Technology Conference in San Jose, California. But an emerging bottleneck at the network layer threatens to make bigger and brawnier pro Read more…

Who is David Blackwell?

March 22, 2024

During GTC24, co-founder and president of NVIDIA Jensen Huang unveiled the Blackwell GPU. This GPU itself is heavily optimized for AI work, boasting 192GB of HBM3E memory as well as the the ability to train 1 trillion pa Read more…

MLPerf Inference 4.0 Results Showcase GenAI; Nvidia Still Dominates

March 28, 2024

There were no startling surprises in the latest MLPerf Inference benchmark (4.0) results released yesterday. Two new workloads — Llama 2 and Stable Diffusion Read more…

Q&A with Nvidia’s Chief of DGX Systems on the DGX-GB200 Rack-scale System

March 27, 2024

Pictures of Nvidia's new flagship mega-server, the DGX GB200, on the GTC show floor got favorable reactions on social media for the sheer amount of computing po Read more…

NVLink: Faster Interconnects and Switches to Help Relieve Data Bottlenecks

March 25, 2024

Nvidia’s new Blackwell architecture may have stolen the show this week at the GPU Technology Conference in San Jose, California. But an emerging bottleneck at Read more…

Who is David Blackwell?

March 22, 2024

During GTC24, co-founder and president of NVIDIA Jensen Huang unveiled the Blackwell GPU. This GPU itself is heavily optimized for AI work, boasting 192GB of HB Read more…

Nvidia Looks to Accelerate GenAI Adoption with NIM

March 19, 2024

Today at the GPU Technology Conference, Nvidia launched a new offering aimed at helping customers quickly deploy their generative AI applications in a secure, s Read more…

The Generative AI Future Is Now, Nvidia’s Huang Says

March 19, 2024

We are in the early days of a transformative shift in how business gets done thanks to the advent of generative AI, according to Nvidia CEO and cofounder Jensen Read more…

Nvidia’s New Blackwell GPU Can Train AI Models with Trillions of Parameters

March 18, 2024

Nvidia's latest and fastest GPU, codenamed Blackwell, is here and will underpin the company's AI plans this year. The chip offers performance improvements from Read more…

Nvidia Showcases Quantum Cloud, Expanding Quantum Portfolio at GTC24

March 18, 2024

Nvidia’s barrage of quantum news at GTC24 this week includes new products, signature collaborations, and a new Nvidia Quantum Cloud for quantum developers. Wh Read more…

Alibaba Shuts Down its Quantum Computing Effort

November 30, 2023

In case you missed it, China’s e-commerce giant Alibaba has shut down its quantum computing research effort. It’s not entirely clear what drove the change. Read more…

Nvidia H100: Are 550,000 GPUs Enough for This Year?

August 17, 2023

The GPU Squeeze continues to place a premium on Nvidia H100 GPUs. In a recent Financial Times article, Nvidia reports that it expects to ship 550,000 of its lat Read more…

Shutterstock 1285747942

AMD’s Horsepower-packed MI300X GPU Beats Nvidia’s Upcoming H200

December 7, 2023

AMD and Nvidia are locked in an AI performance battle – much like the gaming GPU performance clash the companies have waged for decades. AMD has claimed it Read more…

DoD Takes a Long View of Quantum Computing

December 19, 2023

Given the large sums tied to expensive weapon systems – think $100-million-plus per F-35 fighter – it’s easy to forget the U.S. Department of Defense is a Read more…

Synopsys Eats Ansys: Does HPC Get Indigestion?

February 8, 2024

Recently, it was announced that Synopsys is buying HPC tool developer Ansys. Started in Pittsburgh, Pa., in 1970 as Swanson Analysis Systems, Inc. (SASI) by John Swanson (and eventually renamed), Ansys serves the CAE (Computer Aided Engineering)/multiphysics engineering simulation market. Read more…

Choosing the Right GPU for LLM Inference and Training

December 11, 2023

Accelerating the training and inference processes of deep learning models is crucial for unleashing their true potential and NVIDIA GPUs have emerged as a game- Read more…

Intel’s Server and PC Chip Development Will Blur After 2025

January 15, 2024

Intel's dealing with much more than chip rivals breathing down its neck; it is simultaneously integrating a bevy of new technologies such as chiplets, artificia Read more…

Baidu Exits Quantum, Closely Following Alibaba’s Earlier Move

January 5, 2024

Reuters reported this week that Baidu, China’s giant e-commerce and services provider, is exiting the quantum computing development arena. Reuters reported � Read more…

Leading Solution Providers

Contributors

Comparing NVIDIA A100 and NVIDIA L40S: Which GPU is Ideal for AI and Graphics-Intensive Workloads?

October 30, 2023

With long lead times for the NVIDIA H100 and A100 GPUs, many organizations are looking at the new NVIDIA L40S GPU, which it’s a new GPU optimized for AI and g Read more…

Shutterstock 1179408610

Google Addresses the Mysteries of Its Hypercomputer 

December 28, 2023

When Google launched its Hypercomputer earlier this month (December 2023), the first reaction was, "Say what?" It turns out that the Hypercomputer is Google's t Read more…

AMD MI3000A

How AMD May Get Across the CUDA Moat

October 5, 2023

When discussing GenAI, the term "GPU" almost always enters the conversation and the topic often moves toward performance and access. Interestingly, the word "GPU" is assumed to mean "Nvidia" products. (As an aside, the popular Nvidia hardware used in GenAI are not technically... Read more…

Shutterstock 1606064203

Meta’s Zuckerberg Puts Its AI Future in the Hands of 600,000 GPUs

January 25, 2024

In under two minutes, Meta's CEO, Mark Zuckerberg, laid out the company's AI plans, which included a plan to build an artificial intelligence system with the eq Read more…

Google Introduces ‘Hypercomputer’ to Its AI Infrastructure

December 11, 2023

Google ran out of monikers to describe its new AI system released on December 7. Supercomputer perhaps wasn't an apt description, so it settled on Hypercomputer Read more…

China Is All In on a RISC-V Future

January 8, 2024

The state of RISC-V in China was discussed in a recent report released by the Jamestown Foundation, a Washington, D.C.-based think tank. The report, entitled "E Read more…

Intel Won’t Have a Xeon Max Chip with New Emerald Rapids CPU

December 14, 2023

As expected, Intel officially announced its 5th generation Xeon server chips codenamed Emerald Rapids at an event in New York City, where the focus was really o Read more…

IBM Quantum Summit: Two New QPUs, Upgraded Qiskit, 10-year Roadmap and More

December 4, 2023

IBM kicks off its annual Quantum Summit today and will announce a broad range of advances including its much-anticipated 1121-qubit Condor QPU, a smaller 133-qu Read more…

  • arrow
  • Click Here for More Headlines
  • arrow
HPCwire