By the Numbers: Cray Would Like Exascale to Be the Icing on the Cake

By Tiffany Trader

August 1, 2018

On its earnings call held for investors yesterday, Cray gave an accounting for its latest quarterly financials, offered future guidance and provided an update on potential exascale business, including the two CORAL procurement programs.

Cray ended its second quarter with revenues up 38 percent on a year-over-year basis, and though that wasn’t sufficient alchemy to transform red to black, the company had a strong quarter in many respects, reporting major installations worldwide and a robust bidding pipeline. Cray announced yesterday (Tuesday) that revenue for its second quarter came in at $120.2 million, compared to $87.1 million in the second quarter of 2017. The net loss for the latest quarter was $11.0 million, or $0.27 per share, compared to a net loss of $6.8 million, or $0.17 per share from the same quarter last year.

Cray’s overall gross profit margin on a GAAP and non-GAAP basis was 31 percent and 32 percent, respectively, compared to 33 percent on a GAAP and non-GAAP basis in the second quarter of 2017.

On yesterday’s call, Chief Financial Officer Brian Henry reported product margin at 22 percent and service margin at 54 percent. Product margin was lower than typical due to the company being in the final phase of a loss contract, said the CFO.

CEO Pete Ungaro stated that while a loss is always disappointing, it was a solid quarter in many respects with Q2 closing above previous targets due to a couple acceptances that got pulled in. Ungaro highlighted the completion of several large supercomputer and storage systems around the world and the company’s continued push towards its goal to drive growth. “We are maintaining a healthy pace ahead of our expectations this year,” he said.

Business for the quarter included “a number of large XC and CS systems,” and a particularly strong showing in Japan. Q2 saw the completion of the phase 2 XC50 system at the Japanese meteorological agency, which is one of the largest systems Cray has ever deployed in Japan. The first phase was accepted in Q1 this year and combined the systems are expected to deliver a peak performance of more than 18 petaflops. Another large XC50 installation also completed was the new flagship supercomputer for the National Institutes for Quantum and Radiological Science and Technology (QST). And in June, the National Astronomical Observatory of Japan (NAOJ) deployed an XC50 supercomputer, considered the most powerful system dedicated to astrophysical calculations.

Business was also robust for the CS line of cluster supercomputers, said Ungaro, who noted the installation of “one of the largest CS systems at a U.S. government customer as well as other systems at various universities and across multiple commercial customers.”

Other highlights for the quarter include an XC50 and ClusterStor award with the Indian Institute of Technology Bombay, and a five petabyte Cray ClusterStor storage solution for the GENCI supercomputer in France (to be integrated by ATOS).

In June, Cray introduced the ClusterStor L300F Lustre-based flash storage solution, designed for applications that need high-performance scratch storage to quickly store and retrieve intermediate results.

On the AI/analytics side, Ungaro reported a recent win for Urika-GX to a government customer and noted that an existing university customer in Europe selected Cray’s Urika-XC software for their AI workload. In recent months, the company booked five orders for CS-Storm systems. This new “AI business” includes orders from two large commercial companies, government customers and a weather center in New York, according to the CEO.

In June, Cray introduced the Cray Urika-CS AI and Analytics software suite for the Cray CS series, and new Cray Accel AI reference configurations to help both IT and AI teams. It also entered into a partnership with UK Innovation Center Digital Catapult and its Machine Intelligence Garage to help organizations speed the development of machine intelligence systems.

2018 and Beyond

Cray is one of the few tech companies to provide investor guidance and outlook is always a key part of its earnings calls. With the standard caveat that a wide range of results remains possible, CFO Henry said that the company anticipates 2018 revenue in the range of $450 million, which is at the high end of its previous forecast. Projected revenue for the third quarter is about $90 million. Henry said that even though they are anticipating a loss for the year, the tax expense was expected to be nominal.

In the last few calls Cray’s outlook has been clouded by limited visibility, but the company was a little more forthcoming this round, noting that it expects modest growth for 2019 compared to its 2018 outlook.

“Though it is still early in the recovery cycle, our target market at the high-end of supercomputing is continuing to show signs of a rebound,” said Ungaro. “Customer plans for new systems are firming up, creating new opportunities in the market. This is increasing the velocity of opportunities through our sales pipeline and as you may recall that was a key factor in the slowdown in our market over the last couple of years. So, it’s good to see deal flow picking, beginning to pickup pace. I am also pleased to see improvements across our various market segments as well as across our four regions around the world. As a result, our bidding activity has been high this year.”

Going a step further, Ungaro, normally conservative in his estimates, expressed confidence the company can, in a few years, get back to the $700 million run-rate it enjoyed in 2015. What’s even more interesting is that Cray is not leaning on exascale for this forecast.

“We are seeing the market rebound and we feel very confident that the market rebound is going to continue and get back not just to where the market was, but even beyond where the market was and that’s not including exascale,” said Ungaro.

“I’d like to think about exascale as kind of icing on the cake versus the cake (with the general market being the cake),” he added.

Positive indicators for that future success, according to the CEO, include Cray’s leading-edge technology, its product roadmap, its storage lineup and expertise gained through the ClusterStor deal as well as early AI wins. CFO Henry added his expectation that an expanded market and Cray’s larger service business will result in Cray’s return to 2015-era high points even without some of the big DOE opportunities.

Commercial growth is part of this forecast. This year, commercial business is expected to account for about 15 percent of Cray’s bottom line with oil and gas a significant driver. Diversification across geographies and across commercial sectors is very important to the company. Ungaro said that 15 percent commercial representation this year is “a great number” but their goal is to double that over time. Like the rest of the supercomputing business, Ungaro said he expects it to go up and down, but he wants to see the trend line moving in the right direction. He pointed to AI and analytics, and future compute and storage products all being very important to Cray’s strategy to grow and diversify the commercial side.

Speaking of Exascale

Cray confirmed it submitted a proposal for the Department of Energy’s CORAL-2 procurement project, which is on track to award two exascale-class systems with an option for potential third at an estimated proposed budget of $400-$600 million each (with anticipated installment in the 2021 to 2023 timeframe).

We also heard on the call that a new contract has not yet been inked for the moved CORAL-1 target, aka Aurora A21.

“Intel was the prime and we were a partner of Intel on that contract for a large system at Argonne National Laboratory. That system was canceled and the Department of Energy has come out and said that they are expecting to move that system into being the first exascale system that will be delivered to the marketplace. There is not a contract yet and there is work to be done there, but we are still hopeful that that’s going to happen and come out later, but as of right now, we can’t really comment more than what the Department of Energy has said publicly,” said Ungaro.

In commenting on the health of the supercomputing market, Ungaro said the company’s bid opportunity for 2018 is on track to be more than three times what it was in 2017. Some of these opportunities are near-term (i.e., one-to-two years) but a lot is riding on CORAL-1 and the billion-dollar-plus CORAL-2 exascale kitty, which are farther out. In acknowledgement of this, Ungaro noted that the largest opportunities are slated for 2020 and beyond. “So, while bidding activity is strong, because much of it is for future years, we believe that the market rebound will be slower over the next year or two.”

All told, it was not a super exciting quarter for Cray, but there’s also no cliff in sight. Cray shares took a slight dip after the quarterly earnings were announced (opening at $24.45 on Wednesday and closing the day at $23.88). Wall Street seems to be taking a wait-and-see approach, which is a good approach to take when you’re betting on supercomputing, owing to wide-swinging procurement cycles and the vagaries of bleeding-edge development roadmaps.

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