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Cray Inc. Reports 2006 Second Quarter Financial Results

Company Expects Strong Second Half Revenue

SEATTLE, WA--(MARKET WIRE)--Aug 7, 2006 -- Global supercomputer leader Cray Inc. (NASDAQ:CRAY - News) today announced financial results for the second quarter ended June 30, 2006. Total revenue for the quarter was $38.5 million compared to $53.4 million in the same period of the prior year. Net loss for the quarter improved year-over-year to ($7.2 million) or ($0.32) per share compared to ($23.8 million) or ($1.08) per share in the second quarter of 2005.

Cray reported total gross margin of 32.5 percent for the second quarter of 2006, a significant improvement compared to 8.8 percent in the prior year period. Product margin, which improved to 26.6 percent, was the principal driver. Service gross margin of 43.0 percent for the quarter was in line with the prior year.

Research and development and selling, general and administrative expenses in the second quarter were 35 percent lower than a year ago at $16.7 million compared to $25.6 million in the second quarter of 2005.

Second quarter loss from operations decreased 79% to ($4.7 million) compared to ($22.9) million in the prior year period. Included in the second quarter 2006 loss from operations was $0.5 million for restructuring and severance expense, and non-cash items of $0.5 million related to stock compensation and $4.1 million for depreciation and amortization.

For the first half of 2006, Cray reported total revenue of $87.0 million compared to $91.1 million in the prior year. On slightly lower revenue, net loss improved 72% year-over-year to ($12.5 million) in the first half of 2006 compared to ($44.9 million) in the first half of 2005. Net loss for the second quarter and the first half of 2006 was adversely affected by a $1.6 million loss on a foreign currency cash flow hedge associated with a product sale -- this loss was included as other expense. The Company expects the impact of this foreign currency loss will be recovered when the revenue on the related product sale is recognized.

Cash and cash equivalents as of June 30, 2006 were $43.4 million, compared to $69.9 million reported in the first quarter and $46.0 million as of December 31, 2005. Second quarter cash usage was driven primarily by an increase in inventory to $78.6 million from $60.1 million at the end of the first quarter, and recoverable value added tax payments associated with a large international product delivery. Included in inventory as of June 30, 2006 was $54.0 million of inventory at customer sites, up from $38.5 million at the end of the prior quarter. To date, the Company has not drawn upon the credit facility established in the second quarter of 2005.

"One year ago we began a major turnaround effort and we are pleased with our progress to date and the momentum we have in the market," said Peter Ungaro, president and CEO of Cray. "On the strength of our second quarter bookings, gross margin improvements and reduced operating expenses, we are on track to improve our 2006 results from top to bottom. The second quarter brought us one of the biggest wins in supercomputing history in the form of a $200 million multi-year contract with the Department of Energy's Oak Ridge National Laboratory to deliver a petaflops (1,000 trillion floating point operations per second) supercomputer -- the first petaflops supercomputer contract signed worldwide. We followed this up by announcing that we are in negotiations with the UK's Engineering and Physical Sciences Research Council to provide the supercomputer for their future academic and scientific research."

Ungaro added, "Though we are pleased with the improved results to date, we are not done yet and remain focused on key initiatives around customer acceptances and execution. Our longer-term goals continue to be achieving supercomputing market leadership and sustained profitability -- we believe by accomplishing these goals, improved shareholder value will result."


Cray continues to anticipate annual revenue for 2006 will be higher than 2005 levels. Due to the size of a few large orders and the difficulty in predicting the timing of customer acceptances, there remains a large range of potential revenue results in 2006, ranging from modest to potentially 20 percent growth. The Company expects that the second half of 2006 will be stronger than the first half, with a possibility for 60 percent of 2006 product revenue being recognized in the fourth quarter. Operating expenses will increase in the second half of the year primarily due to higher research and development expenses associated with the Cascade program and sales and marketing costs associated with higher anticipated revenue. The Company is likely to use cash in the second half of the year, largely to support working capital requirements, but does not expect to borrow under its credit facility.

In the second quarter of 2006, Cray submitted a proposal to participate in the third phase of the Defense Advanced Research Projects Agency (DARPA) High Productivity Computing Systems (HPCS) initiative. Phase III participants may receive up to $250 million of research and development co-funding through 2010 with the goal of enabling a breakthrough in the capability of the next generation of supercomputers, providing for sustained petaflops levels of performance on real applications and dramatically improving user productivity. The outcome and timing of this award will affect Cray's operating results in the second half of 2006, specifically in the form of increased research and development expense associated with the Cascade program -- third quarter research and development expense could now be double second quarter levels, with fourth quarter levels dependent upon the status of the award. The Company expects the outcome to be announced within the next few months and can give no assurance as to whether it will participate in Phase III of the DARPA HPCS program.

Recent Highlights

--  In June, Cray announced a $200 million multi-year contract with the
    Department of Energy's Oak Ridge National Laboratory (ORNL) to deliver the
    world's largest supercomputer.  Initial deliveries are scheduled in 2006,
    with a planned upgrade in late 2007 or early 2008, culminating in a
    petaflops system to be installed in late 2008.  The ORNL system will be
    based on current and next generation Cray XT3™ supercomputers and will
    utilize current and future versions of the AMD Opteron™ processor.

--  In June, Cray announced that the UK's Engineering and Physical
    Sciences Research Council selected Cray as the preferred bidder to provide
    the computing hardware for the Council's next generation national high
    performance computing service for the UK academic community.  This multi-
    phase project is expected to operate for up to six years and to have an
    initial theoretical peak capability of over 50 teraflops (trillion floating
    point operations per second), with customer options for additional
    capability in the future.  Contract negotiations are ongoing and are not
    expected to be complete until late 2006.

--  In May, Cray announced an order from the Swiss National Computing Lab
    to increase the size of their Cray XT3 supercomputer to more than 8.6
    teraflops.  Cray also announced that a Cray XT3 supercomputer shattered the
    previous performance mark on the widely used Himeno benchmark test
    measuring computational fluid analysis capabilities.

--  In June, Cray announced that the Board of Directors elected William C.
    Blake to the Board.  Blake is a 25-year veteran of the High Performance
    Computing industry and currently serves as Senior Vice President, Product
    Development of Netezza Corporation, which develops, markets and sells data
    warehouse appliances.

Conference Call Information

Cray will host a conference call today, Monday, August 7, at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) to discuss second quarter 2006 financial results. To access the call, please dial into the conference at least 10 minutes prior to the beginning of the call at 1-800-257-1836. International callers should dial 303-262-2125. To listen to the live audio webcast, go to the Investors section of the Cray website at or to

If you are unable to attend the live conference call, an audio webcast replay will be available in the Investors section of the Cray website for 180 days. If you do not have Internet access, a replay of the call will be available by dialing 1-800-405-2236 and entering access code 11068017. International callers can listen to the replay by dialing 303-590-3000, access code 11068017. The conference call replay will be available for 72 hours, beginning at 5:00 p.m. Pacific Time on Monday, August 7, 2006.

About Cray Inc.

As the global leader in supercomputing, Cray provides highly advanced supercomputing systems and world-class services and support to government, industry and academia. Cray technology enables scientists and engineers to achieve remarkable breakthroughs by accelerating performance, improving efficiency and extending the capabilities of their most demanding applications. Cray's Adaptive Supercomputing vision will result in innovative next-generation products that integrate diverse processing technologies into a unified architecture, allowing customers to surpass today's limitations and meeting the market's continued demand for realized performance. For more information, go to

Safe Harbor Statement

This press release contains forward-looking statements. There are certain factors that could cause Cray's execution to differ materially from those anticipated by the statements above. These include fluctuating quarterly operating results, lower margins and earnings due to pricing pressure, the timing of product upgrades, the timing and level of government research and development funding, including DARPA Phase III, supercomputer system purchases and the timing of customer acceptances for products shipped; reliance on third-party suppliers including their competitiveness with other suppliers as well as delays in availability of parts from suppliers; technical challenges of developing high performance computing systems including potential delays in development projects; adequate liquidity and cash resources. For a discussion of these and other risks, see "Risk Factors" in Cray's most recent Quarterly Report on Form 10-Q filed with the SEC.

Cray is a registered trademark, and Cray XT3 is a trademark of Cray Inc. All other trademarks are the property of their respective owners.

(Financial tables to follow)


            (Unaudited and in thousands, except per share data)

                                 Three Months Ended     Six Months Ended
                                      June 30,              June 30,
                                  2005       2006       2005       2006
                                ---------  ---------  ---------  ---------

  Product                       $  40,201  $  24,647  $  66,511  $  58,916
  Service                          13,218     13,866     24,542     28,112
                                ---------  ---------  ---------  ---------

     Total revenue                 53,419     38,513     91,053     87,028
                                ---------  ---------  ---------  ---------

  Cost of product revenue          41,210     18,099     67,562     44,776
  Cost of service revenue           7,531      7,901     15,106     15,594
  Research and development, net    13,427      6,371     26,459     13,586

  Sales and marketing               7,574      5,682     14,173     10,667
  General and administrative        4,607      4,600      8,874     10,194
  Restructuring and severance       1,947        549      1,732      1,287
                                ---------  ---------  ---------  ---------

    Total operating expenses       76,296     43,202    133,906     96,104
                                ---------  ---------  ---------  ---------

    Loss from operations          (22,877)    (4,689)   (42,853)    (9,076)

Other income (expense), net           153     (1,831)      (349)    (1,872)

Interest expense, net                (767)      (441)    (1,204)    (1,049)
                                ---------  ---------  ---------  ---------

    Loss before income taxes      (23,491)    (6,961)   (44,406)   (11,997)

Income tax expense                    305        212        425        481
                                ---------  ---------  ---------  ---------

    Net loss                    $ (23,796) $  (7,173) $ (44,831) $ (12,478)
                                =========  =========  =========  =========

    Basic and diluted net loss
     per common share           $   (1.08) $   (0.32) $   (2.03) $   (0.56)
                                =========  =========  =========  =========

    Basic and diluted weighted
     average shares outstanding    22,098     22,451     22,063     22,395
                                =========  =========  =========  =========

The above shares outstanding and per share amounts are adjusted to reflect
the Company's recent 1 - 4 reverse stock split, effective June 8, 2006

                        CRAY INC. AND SUBSIDIARIES

              (Unaudited and in thousands, except share data)

                                                December 31,    June 30,
                                                    2005          2006
                                                ------------  ------------
Current assets:
   Cash and cash equivalents                    $     46,026  $     43,372
   Accounts receivable, net                           55,064        42,234
   Inventory                                          67,712        78,643
   Prepaid expenses and other current assets           2,909         3,853
                                                ------------  ------------
          Total current assets                       171,711       168,102

Property and equipment, net                           31,292        26,347
Service inventory, net                                 3,285         3,220
Goodwill                                              56,839        58,818
Deferred tax asset                                       575           602
Intangible assets, net                                 1,113         1,203
Other non-current assets                               8,190         7,448
                                                ------------  ------------
          TOTAL ASSETS                          $    273,005  $    265,740
                                                ============  ============


Current liabilities:
   Accounts payable                             $     14,911  $     22,652
   Accrued payroll and related expenses               12,145        13,820
   Other accrued liabilities                          10,702         7,560
   Deferred revenue                                   81,749        76,846
                                                ------------  ------------
          Total current liabilities                  119,507       120,878

Long-term deferred revenue                             5,234         4,361
Other non-current liabilities                          2,317         2,309
Convertible notes payable                             80,000        80,000
                                                ------------  ------------
          TOTAL LIABILITIES                          207,058       207,548

Shareholders'  equity:
   Common stock                                      422,691       423,019
   Exchangeable shares                                   576             -
   Deferred compensation                              (2,811)            -
   Accumulated other comprehensive income              6,258         8,418
   Accumulated deficit                              (360,767)     (373,245)
                                                ------------  ------------
          TOTAL SHAREHOLDERS' EQUITY                  65,947        58,192
                                                ------------  ------------
           EQUITY                               $    273,005  $    265,740
                                                ============  ============


Cray/Media: Steve Conway 651/592-7441   Investors: Victor Chynoweth 206/701-2094