Cray delivered a stack of good news this week, topped off by its latest financial results that showed the supercomputer maker had turned a profit of $3.4 million in the second quarter of 2009. Prior to the earnings report, Cray announced it had received two Department of Energy (DOE) contracts worth a total of $70 million.

One data point that helps illuminate Cray’s recent success is how well it’s doing at the highest end of the HPC market. The company’s main competition in that segment is IBM, but lately Cray has been edging out its larger rival. CEO Peter Ungaro noted that in 2008 Cray snagged the number one market position in systems that sold for over $3 million. This was according to IDC research that Ungaro referenced in this week’s conference call in which he discussed the latest quarterly results.

It might seem surprising that a niche OEM would be gathering profits in the midst of an economic tsunami that has flattened most of the IT market. But for such a situation, Cray has exactly the right customer base– namely the government sector. During a recession, the people who can print money tend to be the most reliable buyers.

Stimulus money in the US and elsewhere is certainly helping to boost the company’s bottom line. Ungaro mentioned the latest DOE deal for the “Jaguar” upgrade at Oak Ridge National Lab (ORNL) and the recent Swiss National Supercomputing Centre (CSCS) contract as two examples where government stimulus money has made its way into Cray’s piggy bank.

Additional good news is that over the past 12 months, the company has retired most of its $80 million debt, taking advantage of discounted rates offered by its debt holders. Today, only $164,000 remains in convertible debt versus a net cash reserve of $69 million.

Cray’s stock seems to reflect the company’s rising fortunes. It has been steadily climbing since December of 2008, when it was selling at about $1.50 per share. A few thousand shares bought at that time would have made an excellent Christmas gift. The stock is currently hovering at around $9 per share, which represents a two-year high.

Despite this quarter’s profits, Cray is still $1.5 million in the hole for the year. But revenue is up 88 percent for the first six months of 2009 compared to last year, and currently stands at $137.2 million. The company is projecting a record $290 million in total revenue for the entire year and expects to realize a “modest profit” for 2009. Cray has flirted with profitability in recent years, but the last time the company actually achieved it was 2003. This year though may be Cray’s best chance to turn the business into a money-maker.

With its flagship XT supercomputer line, the company has been on a roll. In June, the Railway Technical Research Institute (RTRI) in Japan installed an XT4 supercomputer (along with a CX1 deskside system). Also in June, the Swiss National Supercomputing Centre upgraded its XT3 system to an XT5 system. In July, Cray announced that the Finnish Meteorological Institute (FMI) selected a Cray XT5m, which is expected to be installed in Q4 of this year.

One of the DOE deals mentioned above is a multi-year $50 million contract to install a petascale supercomputer at the National Energy Research Scientific Computing Center (NERSC) located at Lawrence Berkeley National Laboratory. That initial delivery will be based on the XT5 technology, but the final production system slated for late 2010 will be based on a “future-generation Cray supercomputer.” Presumably, Cray had to beat out IBM on this lucrative deal, yet another sign that Cray has its mojo back.

Cray is also reaping the rewards of a growing XT customer base with follow-on custom engineering contracts. Since the XT line is Opteron based, all the Socket F compatible AMD CPUs can be plugged into older machines with just a BIOS upgrade. This allows supercomputing facilities to boost machine performance in place without having to add new cabinets or replace existing ones.

The second DOE contract announced this week involves such an upgrade. The 1.64 petaflop supercomputer at ORNL will be pushed to over two peak petaflops by swapping the older quad-core “Shanghai” chips for shiny new six-core “Istanbul” CPUs. The contract is worth $20 million to Cray. The work is underway now and is expected to be wrapped up before the end of the year. ORNL’s Franklin supercomputer is also being boosted with Istanbul parts as well as additional memory.

Cray’s longer term prospects may be even brighter. Today, the majority of its revenue is being driven by big supercomputing deals and custom engineering contracts. But with the newer CX1/LC-CX1 deskside machines for the low-end market and the XT5m systems for midrange users just starting to make their way into the market, the potential revenue base has become much larger — up to $5 billion. Even grabbing a relatively small chunk of that market would have a big impact on Cray’s bottom line.

The company can also expect to tap into additional stimulus money over the next year-and-a-half as the money gets injected into government labs and supercomputing centers around the world. Ungaro said that they’re not relying on stimulus money to move the business forward, but they will definitely go after those opportunities as they become available. “It’s clearly something we have our eyes set on,” he added.

In 2010, a couple of technology upgrades are in the offing. Ungaro wouldn’t divulge any details about them, except to say that the first upgrade is a relatively low risk effort, adding that they already have early versions of the technology in-house. This one is scheduled to drop in the first half of the year. Ungaro characterized the second upgrade as “a major development” for the company, encompassing both new hardware and software. This offering is slated for introduction sometime in the second half of 2010.