APPLICATIONS

Cray announced financial results for the fourth quarter and full-year 2006. Total revenue for the fourth quarter was $101.4 million compared to $65.3 million in the prior year period. Net income for the quarter improved significantly to $8.7 million or $0.33 per share compared to a net loss of ($9.2 million) or ($0.42) per share in the fourth quarter of 2005. Total gross margin for the fourth quarter was 25.4 percent compared to 24.4 percent in the prior year period. Product margin for the fourth quarter was 22.1 percent and included a low margin contract entered into in 2004 of approximately $38 million of product revenue. Service margin for the fourth quarter was 42.1 percent. Core operating expenses, consisting of research and development (R&D), sales and marketing, and general and administrative (SG&A), were $16.6 million in the fourth quarter compared to $18.3 million in the fourth quarter of 2005. As anticipated, R&D expense was sequentially lower in the fourth quarter, compared to the 2006 third quarter, due primarily to the timing of the Defense Advanced Research Projects Agency's (DARPA) High Productivity Computing Systems Phase III contract, which was signed in the fourth quarter of 2006. SG&A expenses were sequentially higher than the 2006 third quarter due primarily to higher commissions and variable incentive expense. Fourth quarter income from operations was $9.2 million compared to a loss from operations in the prior year period of ($9.2 million). Included in fourth quarter 2006 results from operations were non-cash items of $0.6 million related to stock compensation and $3.5 million for depreciation and amortization. For the year 2006, Cray reported improved results throughout the income statement, with revenue of $221 million and a net loss of ($12.1 million) or ($0.53) per share compared to $201 million and net loss of ($64.3 million) or ($2.91) per share in 2005. Total gross margin for 2006 improved to 28.9 percent compared to 16.2 percent in 2005, while core operating expenses declined to $69.8 million from $83.7 million in 2005. Loss from operations declined significantly to ($7.2 million) in 2006 compared to ($60.9 million) in 2005. Included in 2006 results were non-cash items of $2.1 million related to stock compensation and $16.2 million for depreciation and amortization. Cash balances as of December 31, 2006 were $140.3 million compared to $44.2 million reported as of September 30, 2006 and $46.0 million reported as of December 31, 2005. The improvement in cash was driven primarily by positive operating cash flow for the year along with the successful completion of a common stock offering, which provided net proceeds of approximately $81.3 million. "2006 was a defining year for Cray, culminating with a handful of very important milestones completed in the fourth quarter, including a $250 million contract with DARPA that is expected to co-fund Cray's core product roadmap through the end of the decade; an $81 million common stock offering that will provide the capital necessary to fund Cray's growth opportunities; the introduction of two new Cray supercomputers; and, importantly, a return to profitability," said Peter Ungaro, president and CEO of Cray. "Eighteen months ago we built a roadmap to return to supercomputing leadership and sustained profitability and, without a doubt, we made great strides toward both of those goals. Our DARPA win and the world's first contract to build a petascale supercomputer at the Department of Energy's Oak Ridge National Laboratory made 2006 one of the most successful contracts and bookings years in the company's history." Outlook While there continues to be a wide range of potential outcomes, Cray estimates total revenue of $230 million to $260 million for 2007. The company believes revenue for the first quarter will be in the range of 20 percent of anticipated annual revenue, though quarterly results are likely to fluctuate significantly. Cray expects improved gross margins for 2007 and anticipates core operating expenses to be modestly higher than in 2006. Within the target revenue range, the company anticipates 2007 operating income of approximately 3 to 7 percent of revenue, including about $3 million of anticipated non-cash stock compensation expense. Assuming target profitability for the year, the company anticipates a diluted share count of roughly 33 million shares at year-end, though quarterly and annual share counts will be affected by operational results and are subject to many variables. Quarterly and annual results for 2007 will be affected by the timing and success of the Cray XT4, Cray XMT and "BlackWidow" product rollouts. The Cray XT4 system is currently available, with a future upgrade planned for later in 2007, while the Cray XMT and BlackWidow systems are not expected to reach general availability until late in 2007. Also affecting 2007 quarterly and annual results will be the level and timing of government funding as well as the timing of customer orders, acceptances and associated revenue recognition.