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Cray Inc. Reports First Quarter 2004 Financial Results; Company announces $43 million international procurement win

SEATTLE--(BUSINESS WIRE)--April 29, 2004--Global supercomputer leader Cray Inc. (Nasdaq NM:CRAY) today reported financial results for the first quarter ended March 31, 2004.

The company reported total revenue of $42.1 million for the first quarter, compared to $44.1 million in the same period last year. Operations for the period resulted in a loss of $3.8 million, or $.05 per share, compared to net income of $1.2 million, or $.02 per share, in the first quarter of 2003.

Product gross margin declined to 30.4 percent from 42.1 percent in the first quarter of 2003 due primarily to product mix. The company shipped fewer-than-anticipated Cray X1(TM) systems and shipped some lower-margin cluster systems. Additionally, low-margin revenue was generated from continued performance on the Red Storm and Cascade engineering projects.

Service revenue declined as expected to $13.8 million, from $16.8 million in the first quarter of 2003. Service margin, at 37.7 percent, was above target.

"Quarter one results were affected by government procurement delays and a general slow-down in the defense segment," said Jim Rottsolk, CEO of Cray Inc. "While we are making progress on the sales front and orders have begun to pick up, the weakness in revenue experienced in the first quarter will continue through the first half. Until we introduce the Cray X1E(TM), Red Storm and Cray XD1(TM) products in the second half, the Cray X1 system remains our major source of revenue.

"Once these new products become available, we anticipate significant, accelerating growth. However, it is unlikely that we will make up for the first half shortfall in time to meet our 2004 plan," said Rottsolk. "We are focused on building our order pipeline, delivering new products and positioning the company for substantial growth and profitability.

"By the end of 2004, we will have the strongest product portfolio in the industry," Rottsolk added. "With the Cray XD1 system along with our previously announced Red Storm and Cray X1 systems, we can address the entire HPC market with high-bandwidth, purpose-built solutions."

Recent Highlights

We are pleased to announce that Korea's Public Procurement Service has selected Cray to supply the next-generation supercomputer to the Korea Meteorological Administration. This award, based on the Cray X1 product family, is worth more than $43 million and is subject to contract completion.

Separately, the Pittsburgh Supercomputing Center (PSC) has advised Cray that it is placing an advance order for the company's upcoming product based on the Sandia "Red Storm" supercomputer. This is the first disclosed customer for the new product line, which will be launched later this year.

Cray previously announced an order for a Cray X1 supercomputer system from Madison Research Corporation for the U.S. Army Space and Missile Defense Command (SMDC). The company also announced the first Cray X1 system order in the subcontinent of India from the Tata Institute of Fundamental Research.

On April 1, Cray completed the acquisition of Vancouver-based OctigaBay Systems Corporation and announced the naming of its high bandwidth product now known as the Cray XD1 system. According to IDC, this acquisition, together with the Red Storm product, more than quadruples Cray's addressable market. The first Cray XD1 beta system has already shipped, with other beta systems expected to follow during the second quarter. Said Rottsolk, "The addition of the Cray Canada team is very exciting for us. The XD1 system rounds out our HPC product line and opens the door to market expansion beyond traditional HPC users."

Investor Conference Call

Management will discuss results and the company's outlook followed by a question and answer session for investors today, April 29 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time). The call-in number is 800-867-0448. International callers should dial 303-275-2170. If you are unable to participate, a replay will be available from 10 a.m. Pacific Time on April 29, 2004 for 48 hours. To access, dial 800-405-2236 or 303-590-3000 (international) -- enter access code 576111. The conference call will be webcast live and will be archived for 90 days. It will be available in the Investors section of the Cray website at http://investors.cray.com.

About Cray Inc.

Cray's mission is to be the premier provider of supercomputing solutions for its customers' most challenging scientific and engineering problems. Go to www.cray.com for more information about the company.

Safe Harbor Statement

This press release contains forward-looking statements. There are certain factors that could cause Cray's execution plans to differ materially from those anticipated by the statements above. These include the technical challenges of developing high performance computing systems, fluctuating quarterly operating results, government support and timing of supercomputer system purchases, the successful porting of application programs to Cray computer systems, reliance on third-party suppliers, Cray's ability to keep up with rapid technological change, Cray's ability to compete against larger, more established companies and innovative competitors, and general economic and market conditions. For a discussion of these and other risks, see "Factors That Could Affect Future Results" in Cray's Annual Report on Form 10-K filed with the SEC on March 12, 2004.

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

                           TABLES TO FOLLOW

                      CRAY INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share data)
                             (unaudited)



                                                Three Months Ended
                                                     March 31,
                                                2003         2004
                                             ------------ ------------

REVENUE:
  Product                                     $   27,284   $   28,368
  Service                                         16,845       13,767
                                             ------------ ------------

     Total revenue                                44,129       42,135
                                             ------------ ------------


OPERATING EXPENSES:
  Cost of product revenue                         17,675       19,755
  Cost of service revenue                         10,281        8,581
  Research and development                         7,475        9,042
  Marketing and sales                              5,521        7,646
  General and administrative                       1,874        2,873

                                             ------------ ------------

    Total operating expenses                      42,826       47,897
                                             ------------ ------------

    Income (loss) from operations                  1,303       (5,762)

OTHER EXPENSE, NET                                   (53)        (386)

INTEREST INCOME, NET                                   6          143
                                             ------------ ------------

    Income (loss) before income taxes              1,256       (6,005)

INCOME TAX EXPENSE (BENEFIT)                          59       (2,162)
                                             ------------ ------------

    Net income (loss)                         $    1,197   $   (3,843)
                                             ============ ============

    Net income (loss) per common share:
        Basic                                 $     0.02   $    (0.05)
                                             ============ ============

        Diluted                               $     0.02   $    (0.05)
                                             ============ ============

    Weighted average shares outstanding:
        Basic                                     59,780       72,977
                                             ============ ============

        Diluted                                   72,764       72,977
                                             ============ ============



                      CRAY INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED BALANCE SHEETS
                            (in thousands)



                                ASSETS

                                           December 31,    March 31,
                                               2003          2004
                                           ------------- -------------
                                                          (unaudited)
Current assets:
   Cash and cash equivalents                $    39,773   $    33,319
   Short term investments, available for
    sale                                         34,570        38,690
   Accounts receivable, net of allowance of
    $1,125 in 2003 and  2004                     48,474        43,506
   Inventory                                     43,022        46,836
   Prepaid expenses and other assets             18,932        17,036
                                           ------------- -------------
          Total current assets                  184,771       179,387

Property and equipment, net                      26,157        29,536
Service spares, net                               4,925         3,636
Goodwill                                         13,344        13,344
Deferred tax asset                               58,595        61,933
Other assets                                      3,797         3,734
                                           ------------- -------------
          TOTAL                             $   291,589   $   291,570
                                           ============= =============

                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable                         $    12,553   $    14,074
   Accrued payroll and related expenses          19,035        16,127
   Deferred revenue                              33,233        36,473
   Other accrued liabilities                      3,480         1,540
   Warranty reserves                                655
                                           ------------- -------------
          Total current liabilities              68,956        68,214


Shareholders'  equity:
   Common Stock, par $.01 -- Authorized,
    120,000 shares; issued and outstanding,
    72,601 and  73,280 shares, respectively     312,646       316,918
   Deferred compensation                           (105)          (60)
   Accumulated other comprehensive loss            (807)         (558)
   Accumulated deficit                          (89,101)      (92,944)
                                           ------------- -------------
                                                222,633       223,356
                                           ------------- -------------
          TOTAL                             $   291,589   $   291,570
                                           ============= =============

CONTACT: Cray Inc.
Investor Contact:
Victor Chynoweth, 206-701-2280
victorc@cray.com

SOURCE: Cray Inc.