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October 11, 2013

Shutdown Signals Serious Hit for SGI

Nicole Hemsoth
sgi

It’s hard to ignore the news filtering in around the effects of the government shutdown, especially for many of our readers who work at some of the top U.S. research institutions and national labs.

But the effects are definitely being felt beyond academia as the vendors who supply those labs and organizations with HPC gear are now facing significant delays, if not outright cancellations of previously ordered high tech goods and services.

As the shutdown drags on, there are a few canaries in the coalmine when it comes to HPC, especially in government and research circles.

This evening SGI reported their preliminary financial results for the first quarter, which ended at the close of September and offered an outlook for the fiscal year ending 2014. That outlook is grim because, as SGI made perfectly clear to investors during a call, there is “current uncertainty related to the timing of various IT projects funded by the U.S. government.” Further, they note that a great deal of the shortfall is centered around “the freezing of funds for a federal project and to delayed acceptance of a non-federal project.” In other words, at least two very, very important projects have gone downhill—if not had their wheels removed entirely.

While SGI does a certain amount of its business in enterprise environments, their real bread and butter is driven by the HPC (and related) space. They have taken several steps in the last year to firm up their position around being a provider of high-end systems and related services for large-scale environments that cater to the big data demands of big enterprise—but frequently to their several government and research customers. For instance, at the beginning of the month, SGI acquired FileTek to bolster their ability to cater to the data-intensive computing set outside of the HPC niche alone, but even in the best of business situations, a shutdown like this would have required a far more stable plan—but that puts them in the same boat as everyone else, of course.

The company’s overall revenue as it relates to high performance computing and the range of services around it (this includes their “big data” as well as services and storage business) is expected to round out at around $134 million—or a total of 91% of their annual revenue. While different analysts will push out different perspectives on this, it’s safe to offer the anecdotal guideline that a large amount of what we in the “traditional” HPC community call HPC is very tied to academia, government and research.

And for SGI, here’s the real clincher:

Core revenue related primarily to High-Performance Computing (HPC), Big Data, Storage, and services is expected to be approximately $134 million, representing 91% of total revenue for the quarter. This reflects sequential growth of 6% over the prior quarter core revenue of $126 million. Consistent with the company’s strategic withdrawal from commodity server markets, legacy cloud revenue for the fiscal first quarter is expected to decline to approximately $14 million, which compares with $45 million in the prior quarter.

As Jorge Titinger, president and CEO of SGI noted, “with the Federal government shutdown, it is virtually impossible to transact business with most of our Federal customers at this time, which adds significant risk to our near-term revenue outlook and impairs our visibility as to the timing of the expected restart of Federal projects.”

For the fiscal year ending June 27, 2014, the company currently expects that the government shutdown and possible spillover effects could result in a reduction in revenue for the year of approximately 10% versus its prior revenue expectations of approximately $760 million, with most of this impact occurring in the fiscal first half ending Dec. 27, 2013.

Is this the beginning of a wave of such reports? How’s the temperature where you are?