SEATTLE, Nov. 3 -- Global supercomputer leader Cray Inc. today announced financial results for the third quarter ended September 30, 2008. Revenue for the quarter was $54.6 million compared to $55.0 million in the prior year period. The company reported net income for the quarter of $5.0 million or $0.15 per share compared to net income of $5.1 million or $0.16 per share in the third quarter of 2007.

Total gross margin for the third quarter was 51.2 percent compared to 40.3 percent in the third quarter of 2007. Product margin for the third quarter was 54.6 percent compared to 40.1 percent in the prior year period and benefited from product mix and favorable contract adjustments. Service margin for the third quarter was 43.4 percent compared to 41.0 percent in the prior year period.

Operating expenses for the third quarter were $22.3 million compared to $17.8 million in the prior year period. As in recent quarters, third quarter 2008 research and development (R&D) expense increased over the prior year period. Included in third quarter 2008 results was $0.8 million related to net stock compensation.

For the nine month period ended September 30, 2008, Cray reported total revenue of $127.5 million compared to $128.7 million in the prior year period. Due primarily to the previously mentioned increase in R&D expense, total operating expenses increased year-over-year to $66.3 million for the nine month period ending September 30, 2008, compared to $53.1 million in the prior year period. Net loss was ($10.7 million) or ($0.33) per share for the nine months ended September 30, 2008 compared to a net loss of ($2.1 million) or ($0.07) per share for the nine month period ended September 30, 2007.

Cash and short-term investment balances as of September 30, 2008 were $103.6 million compared to $115.0 million as of June 30, 2008.

"We are very pleased to report a profitable quarter," said Peter Ungaro, Cray president and CEO. "The third quarter benefited from strong performance across all of our product lines, as well as growing traction in our custom engineering business."

Ungaro added, "We are positioned for a strong 2008. During the third quarter we achieved a major milestone by successfully delivering all of the cabinets for the petaflops system to Oak Ridge National Laboratory, ahead of schedule, and we have now shifted our focus to completing installation and achieving system acceptance. Also in the third quarter, we announced the Cray CX1 personal supercomputer in partnership with Microsoft and Intel, which is designed to deliver unprecedented performance and productivity in an affordable and adaptive system, featuring a choice of Microsoft Windows HPC Server 2008 or Linux. With continued focus on execution and progress on our new strategic initiatives, we have recently more than doubled our addressable market, creating new opportunities for growth and profitability. In October we retired just over half of our $80 million of outstanding convertible notes, reducing our debt at a discount -- a move that is positive for both our customers and shareholders."

Outlook

A wide range of potential outcomes for 2008 remains. The company's 2008 results are highly dependent on the acceptance of the petaflops (1,000 trillion floating point operations per second) supercomputer at Oak Ridge National Laboratory (ORNL). If the acceptance occurs in late 2008, then the company expects to have revenue for the year in the range of $265 million and to be profitable from operations. If the Oak Ridge system is not accepted this year, then 2008 revenue would be adversely impacted by about $100 million and the company would have a net loss for the year.

At the $265 million revenue level, the company expects 2008 overall gross margin to be up from the prior year to about 37 percent and 2008 operating expenses to be approximately $92 million, including $51 million in net R&D expense. The 2008 operating expense estimate includes a significant increase for commissions and other variable compensation resulting from anticipated fourth quarter revenue growth.

A wide range of potential outcomes exists for 2009, with the principal drivers being customer acceptances achieved in 2008 and winning new business for 2009. Assuming 2008 revenue of about $265 million, the company expects that 2009 revenue will be flat to modestly down from that level, with revenue likely higher in the first and last quarters of the year.

The company's 2009 revenue forecast is heavily dependent on 2008 actual results, with the 2009 revenue estimate changing inversely with the final 2008 results. For example, if actual 2008 revenue were higher than anticipated, due to acceptances of certain systems occurring earlier than expected, then 2009 revenue expectations would concurrently be lowered. Alternatively, if the ORNL petaflops system is not accepted this year, then the company's 2009 revenue forecast would increase dramatically.

The company expects overall 2009 gross margins to decrease to approximately 30 percent. The expected decrease from 2008 levels is due primarily to a shift in product mix in 2009 and the negative impact of a multi-phase contract for approximately $41 million that has a very low margin due to a delay of critical parts from a supplier; this revenue is anticipated to be recognized in late 2009. Operating expenses in 2009 are anticipated to be flat to somewhat down from 2008 levels. Based on these current revenue and margin assumptions, a modest loss for 2009 is likely.

Cash will continue to fluctuate significantly in the coming quarters, depending heavily on timing of deliveries and acceptances. Reported cash and investments for the fourth quarter of 2008 will be impacted by the approximately $37 million used to repurchase slightly over $40 million of convertible debt early in the fourth quarter. Net cash (cash less the remaining outstanding convertible debt) is anticipated to increase by the end of the fourth quarter compared to the level at the end of the third quarter of 2008.

For the remainder of 2008 and 2009, quarterly and annual results will be affected by many factors, including the timing of customer acceptances, the success in winning new business, the availability of qualified parts from suppliers, revenue recognition, the level of margin contribution, the potential for recording an impairment of goodwill, the worldwide economic crisis and potential changes in government spending priorities.

"We remain optimistic in our ability to increase our product differentiation in a significantly expanded market and to generate sustained, long-term profitability," said Peter Ungaro. "New initiatives like the CX1 and custom engineering are gaining momentum and already providing enhanced opportunities for growth in revenue and market share."

Recent Highlights

In August, Cray unveiled ECOphlex, a revolutionary liquid cooling technology that allows cutting-edge performance while driving down the total cost of ownership through significant energy savings and installation flexibility. All Cray XT5 systems have begun shipping with Cray ECOphlex technology.

In September, in partnership with Microsoft and Intel, Cray unveiled the Cray CX1 personal supercomputer. With U.S. list prices starting at $25,000, the Cray CX1 is designed to drive high productivity computing into the mainstream in a broad array of markets including financial services, aerospace, automotive, petroleum, life sciences, government, academic and digital media.

During the third quarter, Cray signed a custom engineering contract to design and develop the infrastructure and system software for a specialized high performance U.S. government computer. Under this contract, Cray is responsible for a portion of the architecture, system design and hardware and software development.

Cray was awarded a contract in October to upgrade the existing Cray XT3 supercomputer at the Japan Advanced Institute of Science and Technology to a Cray XT5 supercomputer. The Cray XT5 system, with a peak performance of 18.8 teraflops (trillions of calculations per second), will be the first to utilize Cray's ECOphlex technology in Japan.

In October, Cray repurchased just over $40 million worth of its 3.0% Convertible Senior Subordinated Notes expected to be put to the company in December 2009 for approximately $37 million plus accrued interest. This transaction resulted in an accounting gain to be recorded in the fourth quarter of 2008 results.

For the complete results, go to http://investors.cray.com/phoenix.zhtml?c=98390&p=irol-newsArticle&ID=1221271&highlight=.

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Source: Cray Inc.