Cray (Nasdaq: CRAY) CEO Peter Ungaro made a curious statement in laying out his company's fiscal 2007 report yesterday: "Our goals and clear intent for 2008 are to be profitable and to grow."
The statement seems calculated to elicit the response: "Well, duh! Isn't that everybody's goal?" But since Cray was unprofitable and shrank in 2007, perhaps Ungaro felt it necessary to reassure investors.
Still, you have to give management credit for delivering on a promise from last quarter: "2007 revenue will likely be below $190 million, with a loss for the year." Sure enough, sales came in at $186.2 million, down 16% year over year. But on the bright side, by selling less stuff, Cray lost less money. (Hmm, there's a thought.) Rather than the $0.53 per share it lost in 2006, the supercomputer maker lost only $0.18 in 2007.
Cray did have one bit of good news to report: Its gross margin improved over the 2006 comparison. In fact, at 35.1% for the year, Cray's gross margin is better than Hewlett-Packard's (NYSE: HPQ) -- though it's also less than the figure at either Sun Microsystems (Nasdaq: JAVA) or IBM (NYSE: IBM). What's more, Hewlett-Packard's business involves much more than just supercomputers, and H-P, unlike Cray, also generated positive net income.
Will Cray ever overtake the other two supercomputer makers on gross margin? Will it ever catch up to any of them on operating margin? Perhaps, but not today. And probably not for at least the next six months. Ungaro warned investors to expect a bumpy fiscal 2008 and precious little good news in the first half of this year.
Revenue is supposed to grow in comparison with 2007, but that growth will be "weighted heavily toward the second half of the year," we're told. "Increased operating expenses" will probably eat up much, if not all, of the profit. And Cray "anticipates using cash over the course of the year, very heavily in the first two quarters, as the company builds inventory for planned customer shipments in the second half of the year." So Cray's free cash flow, which was the sole redeeming quality I saw in the company back in May, is going bye-bye.
All of this leads me to conclude that even though Cray claims to be the "global supercomputer leader," it simply doesn't compute as an investment.
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