APPLICATIONS

Cray reported first quarter revenues fell to $47.1 million from $48.5 million, although it shaved its net loss to $800,000, or a loss of 3 cents per share, compared to a loss of $5.3 million, or a loss of 24 cents a share in the first quarter of 2006. Total gross margin for the first quarter of 2007 was 33.0 percent compared to 29.2 percent in the prior year period. Product margin for the first quarter was 30.0 percent compared to 22.2 percent in the first quarter of 2006. The product margin improvement occurred primarily as a result of increased higher margin core product revenue and a decrease in low margin research and development related project revenue. Service margin for the first quarter returned to a more normalized level at 40.5 percent compared to 46.0 percent in the first quarter of 2006, which was buoyed by a high-margin technical services contract. Operating expenses were $17.4 million in the first quarter compared to $18.5 million in the prior year period. Operating expenses in the prior year period included about $700,000 related to restructuring and severance. Included in first quarter 2007 results were non-cash items of $3.5 million for depreciation and amortization and $1.0 million related to stock compensation. Cash and short-term investment balances as of March 31, 2007 were $147.6 million compared to $140.3 million reported as of December 31, 2006. "We had a solid first quarter on the revenue line and demonstrated continued progress throughout the income statement. On the sales side, we had a strong bookings quarter, driven primarily by two important customer wins in Europe and included bookings across all three product lines, including the planned BlackWidow and Cray XMT systems," said Peter Ungaro, president and CEO of Cray. Outlook Quarterly and annual results for 2007 will be affected by many factors, including the timing and success of the Cray XT4 and "BlackWidow" product rollouts. The Cray XT4 system is currently available and shipping, with an important upgrade to a quad-core Opteron processor from AMD planned in late 2007. Planned ASIC re-spins for the BlackWidow and Cray XMT systems will likely result in initial BlackWidow deliveries in late 2007 and initial Cray XMT system deliveries in 2008. These changes in the anticipated timing of product availability have impacted the company's outlook for 2007. While there continues to be a wide range of potential outcomes for quarterly and annual results, Cray now estimates the mid-point for the 2007 revenue range to be about $230 million. This estimate assumes a significant contribution from quad-core Cray XT4 systems and upgrades, as well as a contribution from initial BlackWidow sales. The company anticipates as much as 50% of full-year product revenue could be recognized in the fourth quarter, while second and third quarter results are expected to be mixed, with the third quarter likely benefiting from a very large product acceptance of about $40 million and the second quarter potentially having minimal product revenue. Cray continues to expect improved gross margins for 2007, modestly higher operating expenses compared to 2006 and profitability for the year. "We are clearly disappointed with the impact of the re-spins on our 2007 outlook, particularly so given the progress made over the past two years," stated Peter Ungaro. "We are actively working to further improve development and other business processes, continuing to add capability and breadth to our product portfolio. We remain very positive about the opportunities we see ahead." Recent Highlights -- In April, Cray announced an order that will nearly triple the capability of the Swiss National Supercomputing Centre's (CSCS) Cray XT3(TM) system from 8.5 teraflops (trillion floating point operations per second) to 22.8 teraflops. The upgrade will be achieved in two phases: first, the existing system will be upgraded with dual-core AMD Opteron processors, which will be followed by the installation of a fully compatible Cray XT4 supercomputer planned for late 2007. The existing Cray XT3 system began operational weather forecasting in support of MeteoSwiss in February 2007. -- In April, Cray announced completion of the Department of Energy's Oak Ridge National Laboratory's Cray XT3/XT4 system upgrade to 119 teraflops. The system continues to be one of the world's most powerful supercomputers, dedicated to advancing the frontiers of neutron science, biological systems, energy production, advance materials and other groundbreaking science. -- In February, Cray announced an $85 million multi-year contract to deliver a massively parallel processing hybrid supercomputer that will be the centerpiece in the UK Engineering and Physical Sciences Research Council's High End Computing Terascale Resources (HECToR) project. The Cray system, which will leverage the Cray XT4 platform, along with planned BlackWidow and Baker systems, will serve as the next generation high performance computing resource for the UK academic community. The initial installation for this multi-phase project is currently scheduled to begin in the third quarter of 2007. -- In January, Cray announced a multi-phase contract with the U.S. Army Engineer Research and Development Center to upgrade its existing Cray XT3 supercomputer and install a new Cray XT4 supercomputer. The two systems will provide a six-fold increase in processing power, with a combined peak performance of over 120 teraflops, to be used in support of various missions of the nation's armed forces.