|CRAY INC filed this Form 10-Q on 10/30/2018|
Results of Operations
We adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers : Topic 606 (ASU 2014-09) at the beginning of the first quarter of 2018. Adoption of ASU 2014-09 did not have a material impact on our results of operations or the comparability of the current and prior periods presented below.
Our revenue, results of operations and cash balances fluctuate significantly from period-to-period. These fluctuations are due to such factors as the strength or weakness of the HPC market, high average sales prices and limited number of sales of our products with variable gross margin levels, the timing of purchase orders and product deliveries, the availability of components, the revenue recognition accounting policy of generally not recognizing product revenue until customer acceptance and other contractual provisions have been fulfilled, the timing of payments for product sales, maintenance services, government research and development funding, the impact of the timing of new products on customer orders, and purchases of inventory during periods of inventory build-up. As a result of these factors, revenue, gross margin, expenses, cash, receivables, inventory and other related financial statement items have in the past varied, and are expected to continue to vary, significantly from quarter-to-quarter and year-to-year.
Revenue and Gross Profit Margins
Our revenue, cost of revenue and gross profit margin for the three and nine months ended September 30, 2018 and 2017, respectively, were (in thousands, except for percentages):
Product revenue for the three and nine months ended September 30, 2018 and 2017 was primarily from sales of our Cray XC and Cray CS supercomputing systems, and ClusterStor storage systems. Product revenue was $12.7 million higher for the three months ended September 30, 2018, compared to the three months ended September 30, 2017 and $67.9 million higher for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, driven by an improvement in the market in which we operate during the first nine months of 2018.
Service revenue was $0.4 million higher for the three months ended September 30, 2018, compared to the three months ended September 30, 2017 and $1.2 million lower for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017. Our maintenance revenue increased by $1.6 million and $8.0 million, respectively, over the prior year periods, driven by our larger installed system base, including the benefit from longer lifetimes of installed systems due to the slowdown in acquisitions of new replacement systems. Over the same periods, engineering services revenue, which varies significantly from period to period, decreased by $1.3 million and $9.2 million, respectively, driven by the completion of several engineering services contracts that we recognized revenue on during the first nine months of 2017.
Cost of Product Revenue and Product Gross Profit
Cost of product revenue increased by $14.0 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, and increased by $59.0 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, due mainly to higher product revenue. For the three months ended September 30,