SGI releases 2nd quarter results

You can see them here. $93,8M revenue, $29.5M gross profit. COGS of $64.4M. OPEX of $58.1M. Operating profit (loss) is $29.5M – $58.1M or -$28.6M (or for the accounting types with us ($28.6M) ). When they are done with the rest of accounting, their net income is ($35.1M) or -$35.1M.

This is a net loss, but it is lower than previous net losses by $4.6M. Their revenue increased $14.8M or so.

The issue appears to be in part, the $43.2M SG&A cost. If they could halve that, they would be well on their way to profitability.

The problem is that SG&A includes the salaries of all the folks working to sell and market this gear.

I have noted in the past that they are far too large (e.g. too many people) for the market they are in with the revenue they have.

They can double their revenue, which would also about double their COGS, without impacting SG&A that much. By doing so, they would reduce their loss making to close to zero. Their R&D work is about $14.3M. They might be able to trim that by tossing underperforming product lines, and halting the associated development.

They can purchase lower cost kit. Remember, they don’t make very much of what they sell these days. They buy their storage from DDN, and others. They buy their kit from flextronics and other manufacturers (Inventec, etc). They might be able to trim COGS a bit there. Heck, they could buy/re-badge JackRabbit for a much lower cost than DDN/others, and pocket the difference. Could make a noticeable dent in their bottom line, and allow them to expand their addressable market.

What they have to do to be successful is to make some hard decisions about what they are, their product mix going forward, be honest with themselves about prospects of success in particular sub-markets, and find the lowest cost providers of various technologies that enhance their competitive positions and allow them to differentiate upon that.

The question is, can they do this.

Notice that their stock has gone from $5 to about $12 in recent days. Why this is, is a mystery to me. Ok, put another way, I am asking “why SGI” as there doesn’t appear to be anything specifically fundamentally better about the numbers. So if you look at others in the market in HPC: NVDA shows a similar bounce, as does MSFT, as does CRAY, …

That is, it looks like investors were looking for places to park their money … fast … over the last two weeks. Huge sums were pulled out of the financial stocks. In amazingly short times. HPC shows good solid growth, and it it probably one of a few areas where capital flowed in. Looking at the volume on CRAY, it spiked when CRAY hit a recent maximum. In SGI’s case, it was hovering around 7 all of last week until thursday morning and then late in the trading day on friday. Volume spikes at those points.

Looking over the headlines, there doesn’t appear to be a business related reason for the spike. It appears to be a capital flow, looking to find a safer haven than fininacial stocks.

I could be wrong, but I am just not finding a business related reason for the stock to rise the way it did.

Then again, in these times, who knows what drives investment decisions. Fear of loss of capital/principal. Not a run on a bank per se, but a run on the equity valuation of a sector of the market.

I heard on the radio last week that investors were bidding on bonds from the US treasury with 0% interest for 3 months, just to find a safe place for their capital. This suggests that there are not enough places to place capital … safely. Tech and HPC may make sense then, even for loss making companies like SGI. Indeed, look over the tech market and you will see massive influx of investment over the past 2 weeks.

SGI has ample challenges ahead. I have said they have to get their cost structures (SG&A) in line with their revenues and addressable market for a while. Sadly this will result in (many) more layoffs, and product EOLs.

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