Press Release

SGI Reports Third Quarter Fiscal Year 2008 Results

Order Momentum Continues; Strong Q4 Start with Significant Wins

SUNNYVALE, Calif. (May 6, 2008)—SGI (NASDAQ: SGIC) today announced financial results for the third quarter of fiscal 2008, which ended March 28, 2008.

The Company's Webcast and conference call to discuss results is Tuesday, May 6 at 2:00 p.m. PDT. The Webcast and presentation materials will be available on the SGI Investors Relations Web page at the time of the call, at www.sgi.com/company_info/investors/.

Third Quarter FY08 Highlights
Overall in its third quarter, SGI:

  • Grew orders 50 percent over orders received in the third quarter of the prior year
  • Grew backlog to $134 million as of March 28, 2008, an 80 percent increase over the beginning of the company's fiscal year on a comparable basis
  • Accelerated its software strategy with acquisition of key IP assets formerly owned by Linux Networx

"We have made great strides in continuing to execute on our strategy this quarter," said Bo Ewald, SGI Chief Executive Officer. "We saw a 50 percent increase in orders compared to the third quarter of last year, acquired significant software assets to strengthen our business and accelerate development of our Industrial Strength Linux Environment, announced a new support solutions program to reinforce our services offerings, and continued building on solid traction in our core markets. And with new significant customer wins in April, the fourth quarter is off to a strong start as well."

In this press release, SGI uses certain pro forma financial measures that are not calculated in accordance with GAAP, or non-GAAP financial measures. These measures are referred to as "pro forma" in this press release. In addition, the company uses bookings and backlog to measure performance. Bookings, also referred to as orders, reflect authorized orders for SGI products and professional services accepted in the period that are expected to ship in the next twelve months. Backlog is the cumulative bookings for which the company has not yet recognized revenue. Management believes that these non-GAAP financial measures, bookings and backlog are useful to investors because they facilitate period to period comparisons of SGI performance and because they help investors view the company's results of operations through the eyes of management and the company's lenders. SGI's credit line covenants, management reporting and incentive plans are measured against certain of these non-GAAP financial measures.

GAAP Q3 Results
GAAP revenue for the third quarter was $79.1 million, compared to $90.1 million in the second quarter. The third quarter GAAP operating loss was $40.6 million, compared to $30.8 million in the second quarter of fiscal 2008. GAAP operating expenses were $59.2 million for the third quarter of 2008, as compared to $58.6 million for the second quarter of fiscal 2008.

Pro Forma Q3 Results
Pro forma revenue was $80.9 million in the third quarter of fiscal 2008, compared with $109.1 million in the second quarter of fiscal 2008. Backlog at the end of the third quarter of 2008 grew to $133.9 million compared to $95.8 million at the end of the second quarter of fiscal 2008, the highest backlog level in the past five quarters.

"We are on track with growth in bookings, with much of the growth being attributable to significant wins and large long-term installations," said Kathy Lanterman, SGI Chief Financial Officer. "As we have said, our challenge is the revenue conversion cycle for these long-term orders, where revenue is not recognized for several months or quarters after we receive an order. We expect our operating results to improve as our growing backlog starts converting to revenue over the next two quarters."

Pro forma revenue excludes the impact of fresh-start accounting and the deferral of the company's recognition of revenues for certain of the company's transactions where software is more than incidental to the overall solution pursuant to AICPA Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"). Pro forma gross margin for the third quarter, which is adjusted for similar items, was 26.9 percent compared with 35.7 percent in the second quarter of fiscal 2008. Pro forma operating expenses, which exclude restructuring and reorganization-related expenses, the non-cash impact of the acquisition of IP assets of Linux Networx, stock-based compensation expense and the impact of fresh start accounting, were $52.7 million in the third quarter of fiscal 2008 compared with $55.3 million in the second quarter of fiscal 2008. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of fiscal 2008, as defined in the company's debt agreements, were a loss of $25.7 million, compared with an $11.0 million loss for the second quarter of fiscal 2008.

A reconciliation of the non-GAAP financial measures used in this press release to the company's GAAP results of operations, including an illustration of the impact of the company's fresh start accounting and the impact of the implementation of SOP 97-2, is attached to this press release and is also available at www.sgi.com/company_info/investors.

Strong Start to Fourth Quarter
SGI also reported that it has secured several major domestic and international wins during the fourth quarter to date. These included:

  • NASA chose SGI to supply its next major supercomputer, a 20,480-core, 20TB SGI® Altix® ICE system, after a competitive evaluation the space agency launched last year. The new supercomputer will support NASA's aeronautics, science, space operations and space exploration initiatives, including its plan to resume manned missions to the moon and eventually manned exploration of Mars.
  • SGI entered into a multi-year agreement with total contract payments to SGI expected to be more than $25M with a major national European supercomputing center to equip the institution with high-performance SGI computing and storage solutions. The systems will be used to drive multiple applications and manage massive amounts of data.
  • SGI also will provide a large European weather service with an extensive data warehouse solution, which will run Oracle 10g and Oracle Clusterware. The solution incorporates SGI Altix 4700 and SGI Altix 450 servers, and will enable the weather service to analyze more than 30 years of meteorological data — a challenge that represents 360 terabytes of user data.

"We believe this quarter's wins show significant momentum for SGI across multiple geographies and product lines," added Ewald. "Our ability to prevail in many exceptionally competitive sales situations shows that customers recognize the value of open-standards-based solutions that deliver superior price/performance and leading energy efficiency."

Recent SGI Announcements

  • Virtu VN200: A high density, highly scalable visualization system that can fully incorporate leading edge visualization capabilities into the full line of SGI Altix, SGI Altix XE and SGI Altix ICE servers.
  • InfiniteStorage 4600: A new flagship RAID storage system that augments the InfiniteStorage product line and helps organizations meet the escalating bandwidth and I/O demands of today's performance-driven applications.
  • Virtualized Storage Migration Solution: The new solution allows enterprises to choose the storage device that best suits their needs — an advantage that can lead to better data utilization and significantly lower ownership costs. The new solution also allows enterprises to migrate data without disrupting operations.
  • Climate Savers: SGI joined the Climate Savers Computing Initiative, a nonprofit group of consumers, businesses and conservation organizations dedicated to improving the power efficiency and reducing the energy consumption of computers.
  • Support Solutions Plus: Through this new services support program, SGI provides a single, centralized contact for technical support, secured site management, and parts logistics requirements for many other vendors' products as well as SGI products.
  • SGI Altix ICE enhancements: This quarter Altix ICE boasts new blade enclosures and blade options that increase the performance density of the platform by including improvements to memory, bandwidth and interconnect performance, and an enhanced cluster management environment, as well as make use of the next-generation InfiniBand chip technology.
  • The NBA and SGI announced a multi-year extension of their relationship to expand the league's groundbreaking digital workflow and media management system, the NBA Digital Media Management System. The extended relationship will enable NBA to accelerate and double the historical digital archiving effort by ingesting 60,000 hours of video content each year.

Conference Call
SGI will conduct a conference call today at 2 p.m. PT to provide additional details. The webcast and presentation materials are available at www.sgi.com/company_info/investors/. The conference call can be accessed by dialing (877) 495-0297 or (706) 643-9931 for participants outside of North America, conference ID: 45113222. An audio replay of this call will be available after 5 p.m. PT today at (800) 642-1687 or (706) 645-9291 (passcode: 45113222) and will be available until May 13, 2008 midnight PT. After May 13, 2008, the call will be available as an archived webcast. All links to the archived webcast, presentation materials and audio replay are available through the SGI web site at www.sgi.com/company_info/investors/.

Financial Statements

SGI - Innovation for Results™
SGI (NASDAQ: SGIC) is a leader in high-performance computing. SGI delivers a complete range of high-performance server, visualization and storage solutions along with industry-leading professional services and support that enable its customers to overcome the challenges of complex data-intensive workflows and accelerate breakthrough discoveries, innovation and information transformation. SGI helps customers solve significant challenges, whether it's enhancing the quality of life through drug research, designing and manufacturing safer and more efficient cars and airplanes, studying global climate change, providing technologies for homeland security and defense, or helping enterprises manage large amounts of data. With offices worldwide, the company is headquartered in Sunnyvale, California, and can be found on the Web at sgi.com.

© 2008 SGI. All rights reserved. SGI, the SGI cube, the SGI logo and Altix are registered trademarks of SGI in the United States and/or other countries worldwide. All other registered trademarks mentioned herein are the property of their respective owners.

This press release contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth herein, including increased demands on our working capital due to growth in backlog, in particular for large deals; our ability to raise additional capital in the future on commercially attractive terms or at all, which would restrict our growth and impair our ability to operate; our historical losses and possible failure to attain profitability on a quarterly, annual or sustained basis and risks related to the impact on our business of cost reduction initiatives to be effected in the coming quarters to bring costs more in line with current revenues; our operating results continuing to fluctuate significantly and continuing to be difficult to predict; our stock continuing to have extremely low trading volume and price volatility; our failure to continue growth in bookings, delays in the conversion of backlog to revenue due to application of SOP 97-2, shipment delays and the other risks and uncertainties discussed under the caption "Risk Factors" and elsewhere in SGI's Form 10-K or Form 10-Q most recently filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date hereof. SGI disclaims any intent or obligation to update these forward-looking statements.