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Instant Analysis: SGI Crushes Q2 Estimates, but Shares Slide

By Eric Volkman - Jan 29, 2016 at 8:11PM

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The company also reveals that it is seeking to float $75 million in new securities.

What happened?
The habitually loss-making high-performance hardware and software maker SGI (NASDAQ: SGI) posted a quarter that was actually in the black, although that happy occurrence was overshadowed by less positive news from the company. For its Q2 2016, Silicon Graphics posted revenue of $152 million, 10% higher than in the same period the previous year. Adjusted net income was just over $5 million ($0.14 per diluted share), a vast improvement over the $103,000 of Q2 2015.

Both the top- and bottom-line figures beat analyst estimates. On average, these were for $145 million in revenue and a per-share adjusted net profit of $0.05.

In the press release heralding the results, SGI quoted its CEO Jorge Titinger as saying that it "made significant progress in our high performance data analytics business as we surpassed $10 million in revenue this quarter. We also continued to gain traction winning large deals in [high performance computing]."

On the same day as the earnings were announced, SGI filed a shelf registration with the Securities and Exchange Commission. In it, the company said it intended to publicly float new securities at an amount up to $75 million.

Does it matter?
A shelf registration statement is a document that notifies the public about a company's intention to raise money via the issuance of fresh securities -- oftentimes, this means new stock. So the potential dilution of existing shares is a likely reason why SGI's shares traded down sharply in the wake of the otherwise-positive earnings announcement.

A $75 million issue of common stock -- assuming that's what SGI has in mind -- would result in a high degree of dilution, as the company's current market capitalization is a bit over $177 million at present.

Meanwhile, like many segments of the tech market, high-performance computing isn't exactly low on competition. The big boys of IT are well involved in it, making it harder for a smaller player like SGI to carve out share. IBM and Hewlett-Packard Enterprise, to name only two, are both active in the segment, and even those titans have had their struggles. Hewlett-Packard Enterprise (and its predecessor entity, as it's a recent spin-off of the company now known as HP) is coping with revenue that's slid every year since 2012. IBM's top-line decline dates from 2011.

The difference is that Hewlett-Packard Enterprise and IBM have generally been profitable on the bottom line across those spans of time. By contrast, SGI has usually landed in the red. One positive quarter does not guarantee future success, of course, and that upcoming round of fundraising doesn't instill confidence in the company's viability. We can expect SGI's shares to stay depressed in the shadow of these developments.

Eric Volkman has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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