Cray Exceeds Q3 Target, Projects 10 Percent Growth for 2018

By Tiffany Trader

October 31, 2017

Cray announced yesterday (Monday) that revenue for its third quarter ending in September came in at $79.7 million, slightly higher than the $77.5 million booked in the third quarter of 2016.

The company reported that the pulling of a major acceptance from fourth into the third quarter provided a $20 million boost to its original Q3 target. Cray still expects total revenue for the year in the range of $400 million.

While Cray is meeting its expectations this year, market sluggishness, component delays and other factors have created a downturn since it closed out 2015 with record revenue of $725 million. But the market may finally be showing signs of a modest rebound, according to Cray CEO Peter Ungaro. On the Monday earnings call, he offered guidance that revenue is on track to grow about 10 percent in 2018.

Ungaro acknowledged that 10 percent growth at this point is not huge, but it could indicate a turning point. He said Cray is expecting significant large opportunities across multiple geographies, notably the Americas, EMEA, Asia Pacific and Japan (which Cray counts as a separate region). Some of this revenue will hit 2018, but most of it will be for systems put into production in 2019 and 2020, noted Ungaro.

“That to me really is starting to give us very early signs of a potential market rebound,” he said. “It’s early yet; this is the first quarter we are really beginning to see some signs so I want to be cautious but excited to see these signs. We always believed that the market was going to turn back around and that it wasn’t going to stay muted long.”

Cray would be in a better position for 2018 if the original CORAL contract to provide a 200-petaflops system to Argonne National Laboratory had not been rewritten over the summer, shifting the delivery date from 2018 to 2021. Ungaro said that details of the new exascale-class Aurora contract are still being finalized.

Cray CFO Brian Henry reported that total gross profit margin for the third quarter was about 36 percent with product margin coming in at 23 percent and service margin at 53 percent. He added this product margin was significantly lower than typical due to a $4.1 million anticipated loss on a single large contract scheduled for delivery in 2018. Much of this loss was attributed to rising memory prices. “Nobody would have thought that in the first quarter of 2016 [when they bid the contract] that the prices would be more than double at this time in 2017,” said Henry.

Over the last 12-18 months, Cray’s bottom line has been impacted by an underperforming market, component delays and more recently, slower-than-average adoption of Intel’s Skylake processors. Ungaro commented they usually get about 20-25 percent of their revenues through upgrades and this has slowed down. “The company hasn’t gotten that uptick with the Skylake processors,” he said, attributing this to the increased cost of memory tempering the usual price performance advantage. “We do have a number of opportunities for Skylake,” said Ungaro. “[And] we think it is going to become larger part of market opportunity in 2018, but it’s still relatively muted overall compared to a typical new processor coming to market.”

In closing, Ungaro reminded the investors on the call that the “biggest supercomputing industry conference of the year” SC17 will kick off in Denver in two weeks.

Wall Street reacted favorably to the earnings report. The stock is experiencing unusually high trading volume and shares are up 13.8 percent since Monday morning, closing at $20.65 on Tuesday.

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