Why Silicon Graphics International Corp. Shares Sank

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Silicon Graphics International Corp. (NASDAQ: SGI  ) plunged more than 14% Tuesday morning after the company provided disappointing preliminary fiscal second-quarter guidance.

So what: Quarterly revenue is expected to fall 32% year over year to approximately $116 million, which should translate to an adjusted net loss per share between $0.24 and $0.21. By comparison, Silicon Graphics reported net income of $0.03 per share in the same year-ago period. Analysts, on average, were modeling a net loss of $0.14 per share on sales of $128 million.

Silicon Graphics CEO Jorge Titinger explained the loss primarily stems from the negative impact and "after-effects" of the government shutdown. However, he also noted core revenue outside of the company's federal business grew 14% sequentially, which is why they are "accelerating our initiatives to further penetrate the enterprise market with our extreme high performance in-memory UV system." 

As a result, the company also provided preliminary guidance for the second half of fiscal 2014, saying revenue is expected to be in the range of $260 million to $300 million. 

Now what: Even so, Titinger admitted that's lower than they expected, as the federal business is likely to remain a drag on growth thanks to "near-term delays in certain federal programs."

Shares of Silicon Graphics may look inexpensive trading under 12 times next year's estimated earnings, but keep in mind those estimates are likely to fall once analysts have time to digest today's news. Until Silicon graphics can prove it has what it takes to stop the bleeding and resume profitable growth over the long term, I think investors would do well to remain on the sidelines.

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