SEC Filings

10-Q
CRAY INC filed this Form 10-Q on 10/30/2018
Entire Document
 


2018, product gross profit margin decreased 8 percentage points to 15% from 23% in the same period in 2017. For the nine months ended September 30, 2018, product gross profit margin decreased 4 percentage points to 20% from 24% in the same period in 2017. Product gross profit margins for the three and nine months ended September 30, 2018 and 2017 were below our target margins. In the third quarter of 2017, it was determined that a large contract with product deliveries scheduled in the first and second quarters of 2018 would be performed at a loss of $4.1 million. The loss was attributable in part to higher component costs, predominantly for memory, changes in the configuration of the system from the time of bid, and changes in the exchange rate. We recorded the full amount of the loss in the third quarter of 2017 and no material gross profit on the accepted systems and related services in the first and second quarters of 2018, which negatively impacted gross profit margins for those periods. The decrease in gross profit margins for the three and nine months ended September 30, 3018, compared to the same periods in 2017, also resulted from a higher mix of cluster sales, which typically carry a lower margin, including one relatively large lower margin cluster sale to a U.S. Government customer in the third quarter of 2018. Product gross profit margin in any one period may not be indicative of future results as product gross profit margin can vary significantly between contracts for many reasons.
Cost of Service Revenue and Service Gross Profit
For the three months ended September 30, 2018, cost of service revenue increased by $2.8 million compared to the same period in 2017, primarily due to higher compensation, including incentive compensation, and increased charges for spares. For the nine months ended September 30, 2018, cost of service revenue was largely in line with the same period in 2017. Service gross profit margin for the three months ended September 30, 2018 decreased 7 percentage points to 46% compared to 53% in the same period in 2017, primarily due to higher compensation, including incentive compensation, and increased charges for spares. Service gross profit margin for the nine months ended September 30, 2018 increased 1 percentage point to 49% compared to 48% in the same period in 2017.
Research and Development Expenses
Research and development expenses for the three and nine months ended September 30, 2018 and 2017, respectively, were (in thousands, except for percentages):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Gross research and development expenses
 
$
39,346

 
$
32,836

 
$
113,626

 
$
104,637

Less: Amounts included in cost of revenue
 
(615
)
 
(927
)
 
(2,170
)
 
(8,486
)
Less: Reimbursed research and development (excludes amounts in cost of revenue)
 
(12,569
)
 
(5,283
)
 
(26,020
)
 
(19,560
)
Net research and development expenses
 
$
26,162

 
$
26,626

 
$
85,436

 
$
76,591

Percentage of total revenue
 
28
%
 
33
%
 
29
%
 
34
%
Gross research and development expenses in the table above reflect all research and development expenditures. Research and development expenses include personnel expenses, depreciation, allocations for certain overhead expenses, software, prototype materials and third party contract engineering expenses.
For the three and nine months ended September 30, 2018, gross research and development expenses increased by $6.5 million and $9.0 million, respectively, over the prior year comparative periods, driven by higher compensation and third party costs. For the three and nine months ended September 30, 2018, compensation, including incentive and share-based compensation costs increased by $3.6 million and $6.9 million, respectively, over the prior year comparative period due to increased average headcount and higher compensation costs. For the three and nine months ended September 30, 2018, third party costs increased by $2.2 million and $1.8 million, respectively, over the prior year comparative periods, driven primarily by expenditures under co-funding arrangements for which we will be partially reimbursed.
Net research and development expenses decreased by $0.5 million for the three months ended September 30, 2018 compared to the same period in 2017 as the increase in gross research and development discussed above was offset by an increase in reimbursements for research and development related to new development projects, primarily our next generation “Shasta” system. Net research and development expense increased by $8.8 million for the nine months ended September 30, 2018 compared to the same period in 2017, primarily driven by the increase in gross research and development expenses and a decrease in amounts reclassified to cost of revenue due to the completion of several engineering services contracts, partially offset by higher reimbursements. The amount and timing of research and development costs related to engineering development contracts and the level of reimbursement from third parties for research and development projects varies significantly from period to period, often due to the timing of milestone acceptances, and can have a significant impact on net reported research and development expense in any period. We anticipate that reimbursed research and development will remain at relatively high levels over the next couple of years as a result of these projects.

28