GOVERNMENT

Global supercomputer leader Cray Inc. reported financial results for the second quarter ended June 30, 2004. The company reported second quarter revenue of $21.7 million, compared to $61.8 million in the same period last year. GAAP net loss for the quarter was ($54.5) million, or ($0.64) per share, compared to net income of $7.9 million, or $0.10 per diluted share, in the first quarter of 2003. Non-GAAP net loss was ($11.7) million for the quarter, or ($0.14) per share. Non-GAAP net loss for the quarter excludes $45.8 million in charges related to the acquisition of OctigaBay, the majority of which relates to the write-off of in-process research and development. The majority of the $9.5 million in product revenue came from continued progress on the lower margin Cascade and Red Storm engineering projects. Revenue from the Cray X1(TM), the company's only current product, was negligible for the quarter. Revenue from service was $12.2 million, with increased margins of 36.0%, as compared to 31.3% in the prior year. "While we expected the second quarter to be weak, the weakness was compounded by a contract delay for a major order and a continued general slow-down in the defense segment," said Jim Rottsolk, CEO of Cray Inc. The company recorded a significant increase in backlog, as predicted, of $51 million, to $126 million from $75 million in the previous quarter. "In addition to this increase in backlog, we announced major wins that will be booked in future periods," said Rottsolk. Outlook & Restructuring The company said the following factors will affect the balance of the year: -- The next generation vector product, the Cray X1E, will not generate revenue until the first quarter of 2005 due to delays in engineering and fabrication. -- While production of the Sandia Red Storm system has begun and the first shipment is expected this quarter, delays in part shipments will impact the number of systems that can be delivered to other customers this year. -- Beta shipments of the Cray XD1(TM) product (acquired via the OctigaBay acquisition) have begun; the company expects modest revenue from the new product line to begin this quarter. -- Domestic and foreign government contract terms will delay revenue recognition on three significant Cray X1 orders beyond 2004. "As a result, 2004 revenue will likely be under $200 million. Given both our desire to return to profitability quickly and the opportunity to accelerate progress on the product strategy we announced at last fall's supercomputer conference, we are immediately reshaping our organization," said Rottsolk. The company is reducing its cost structure by about 20 percent; as a result, the company will enter 2005 with quarterly operating expenses no greater than $17-$18 million. Rottsolk further stated, "With our new product set, we are targeting growth in revenue to about $300 million in 2005, not including over $40 million in revenue expected to be deferred. We expect overall gross margin percentage to be in the low to mid 30's. With our new cost structure, we are positioned for solid profitability in 2005 and expect further growth in revenue and profit in subsequent years." The reshaping is being done carefully to enable the company to meet its strategic and financial goals. "Nearly all required personnel actions will be completed this quarter," added Rottsolk. HPC Leadership Strategy Is On Track In the second quarter, Cray significantly advanced its strategy for high performance computing (HPC) industry leadership introduced at the SC2003 supercomputing conference last November. "Going into 2005, Cray will have the strongest HPC portfolio in the industry. With our Cray X1E, Cray XD1 and Red Storm-based product lines, we are expanding beyond leadership in the high-end capability segment and addressing the broader HPC market with high-bandwidth, purpose-built solutions," said Peter Ungaro, Cray Vice President of Sales and Marketing. "Early interest in the Cray XD1 has exceeded our expectations," added Ungaro. "As previously announced, we are teaming with Oak Ridge National Laboratory to provide the world's most powerful sustained-performance computer in the 2006-7 timeframe. This initiative will exploit our previously announced development program, code-named 'Rainier,'" said Ungaro. 'Rainier' integrates high bandwidth capabilities from the Cray X1 series, innovative technologies from the Cray XD1 system, and the scalable and modular Red Storm architecture. Ungaro stated, "'Rainier' will provide the best of vector and scalar microprocessors together in a single high-bandwidth system focused around user productivity and ease-of-use, in addition to overall price/performance. These technological capabilities will both leverage and directly contribute to our research-based 'Cascade' initiative for the DARPA HPCS program, which targets sustained petaflop-level computing in the 2010 timeframe." "Other HPC vendors have recently announced future plans trying to implement heterogeneous systems that combine scalar and vector capabilities. We are confident that Cray's experience and leadership give us a strong advantage in getting there first, with the best solution," added Ungaro. John Seminerio, former CEO of OctigaBay, now President and CEO of Cray Canada remarked that, "The synergies gained by combining OctigaBay with Cray continue to take shape. We expect to bring the Cray XD1 to market well in advance of our previous schedule and are already leveraging key technologies into the 'Rainier' platform." Second-Quarter Highlights During the second quarter, the company also: -- Finalized a five-year contract valued at $43 million to supply the next-generation supercomputer, based on the Cray X1 product family, to the Korea Meteorological Administration (KMA). Other Cray X1 orders were received from GMRI for NASA Ames Research Center, and the Ohio Supercomputer Center (OSC). -- Announced that overall customer-reported scores for the Cray X1 supercomputer system were the best for any high-performance computing (HPC) system on the new HPC Challenge benchmark tests co-sponsored by the DARPA HPCS program, the U.S. Department of Energy and the National Science Foundation. -- Received an order from a Canadian organization for the company's upcoming product based on the Sandia Red Storm supercomputer, for installation in late 2004. Cray previously announced that the Pittsburgh Supercomputing Center (PSC) placed an advance order for a Red Storm-based system, to be installed in the second half of this year. -- Received orders from the Department of Energy's Pacific Northwest National Laboratory (PNNL) and Ohio Supercomputer Center (OSC) for the Cray XD1 utilizing field programmable gate arrays (FPGA's) for advanced application acceleration.