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Cray Inc. today announced financial results for the second quarter ended June 30, 2005. The company reported total revenue of $53.4 million compared to revenue of $21.7 million in the same period last year, representing the first $50 million revenue quarter since 2003. A substantial portion of the revenue in the second quarter of 2005 was from acceptances of four Cray X1E systems, three of which were international orders. Net loss for the second quarter 2005 was ($23.8 million) or ($.27) per share. Included in the second quarter 2005 net loss was a charge of approximately $7.8 million related to additional anticipated completion costs for the Red Storm project, $2.3 million in obsolete and scrap inventory, $1.8 million for amortization of deferred stock compensation expenses and $1.9 million for restructuring expenses. Depreciation and amortization expense was $5.4 million during the second quarter of 2005. In addition, inventory at customer locations grew by over $21 million, representing systems that have been delivered but for which acceptance testing is not yet complete. The company currently has approximately $58.8 million in inventory at customer sites pending acceptances, up from $37.3 million in the first quarter of this year. "While we had a solid revenue quarter, some of our largest and most complex installations have been delayed in getting into full production," commented Peter Ungaro, newly appointed CEO. "We will not recognize the revenue on these systems until we receive customer acceptances, which should happen over the next several months. We have focused our development and customer support teams on accelerating these acceptances and continue to sharpen our business, product and marketing strategies to reduce costs and return to profitability." Cost reduction efforts include measures to reduce operating expenses, a nearly ten percent reduction in the workforce and temporary salary and benefits reduction for Cray employees. The anticipated benefit of the workforce reductions will be approximately $5.5 million annually, with additional salary and benefit reductions of approximately $2.5 million in the second half of 2005. Cray is exploring other ways to further reduce net expenses and the company is also focusing its resources on fewer research and development initiatives. "In the second quarter we strengthened our management team with the addition of Brian Henry as Executive Vice President and Chief Financial Officer and Peg Williams as Senior Vice President responsible for all of our engineering efforts. We also retained new auditors, Peterson Sullivan PLLC, we resolved our Nasdaq listing issues, and we continue to work on our Sarbanes-Oxley controls," said Ungaro. New product bookings during the second quarter were well below both first quarter bookings as well as second quarter revenues. Bookings were adversely affected by seasonal funding cycles. While product backlog decreased from first quarter 2005, the total product backlog remains substantial. The overall gross margin for the second quarter was 9 percent, down from 21 percent in the second quarter of 2004. Product margins in the second quarter were negative 3 percent and were adversely impacted by $7.8 million in additional anticipated completion costs for the Red Storm project, $2.3 million of obsolete and scrap inventory and $0.4 million of amortization of core technology. Adjusting for all of these changes, product gross margin would have been approximately 24 percent. Service margins were unusually strong at 43 percent in the second quarter of 2005 due to higher professional service revenues. Cray completed the second quarter with $8.5 million in cash and short-term investments, down from $43.1 million in the first quarter of 2005. As noted previously, cash balances fluctuate significantly within a quarter as well as from quarter to quarter. Cray's cash position has been adversely affected primarily by operating losses and increased inventory shipped and waiting for customer acceptances. Additionally, the company negotiated a new credit facility with Wells Fargo Foothill in May 2005. As of today, Cray has not drawn upon its new credit facility. Separately, the Cray board of directors announced the appointment of Peter Ungaro as Chief Executive Officer, the appointment of Stephen C. Kiely as non-executive chairman of the board, and the retirement of Jim Rottsolk as Chairman and CEO. Other Recent Highlights -- The Swiss National Supercomputing Centre announced an order for a Cray XT3 system. When it begins operations later this year, it will become one of Europe's most powerful supercomputers. -- The Japan Advanced Institute of Science and Technology announced an order for a Cray XT3 system that will be used in the development of new algorithms for massively parallel computers, large-scale simulations and visualization in nanotechnology and biomechanics, and computational science. -- During the quarter, the company expanded the reseller channel for the Cray XD1 system by five business partners, bringing the total number to 15 across 14 countries. -- Cray received Cray XD1 system orders from Aston University in England, CD-adapco, the Desert Research Institute, Software Cradle and the Alfred Wegener Institute in Germany. -- The company signed a $17 million co-funded development agreement with the U.S. government to work on next-generation supercomputer technologies. -- Spain's National Institute of Meteorology upgraded its Cray X1 supercomputer to a Cray X1E system and began operational weather forecasting on this system. -- The U.S. Army Space and Missile Defense Command ordered an upgrade to its Cray X1E system and a new Cray XD1 system. -- Oak Ridge National Laboratory posted industry leading HPC Challenge performance results for its Cray XT3 system running on 5,200 processors (http://icl.cs.utk.edu/hpcc/index.html). -- The Cray XD1 system demonstrated industry leading performance on LS- DYNA engineering software used for automotive safety analysis from Livermore Software Technology Corporation (www.topcrunch.org). Outlook Cray anticipates that the second half 2005 revenue will be higher than the first half. This outlook assumes the company secures key outstanding customer acceptances as expected. Timing of acceptances is difficult to predict and therefore third and fourth quarter results may vary greatly, though fourth quarter results are likely to be better than third quarter results. The best case scenario would have 2005 total annual revenue of about $220 million. This assumes 100 percent of all possible large system acceptances are achieved and also assumes a modest amount of new second half orders are accepted by year end. One key acceptance delayed beyond year end could impact 2005 revenue by up to $15 million. Additionally, the company expects a decline in operating expenses, benefiting from the cost control measures it has put in place. Despite cost reduction efforts, the company expects to report a loss for the second half of the year. Depending upon the timing of acceptances and resulting cash receipts, the company currently anticipates a modest improvement in its cash position at the end of the third quarter. A wide range of net cash positions are possible at the end of the year, from net borrowing to levels much higher than the balance at June 30, 2005.