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The first half of year has not been easy for supercomputer maker Cray.
The company not only has been working in a high-end supercomputing market that is seeing a slowdown in demand, but also has been dealing with issues integrating new technologies—in particular chips from Intel and graphics technology from Nvidia—that could impact the delivery timetables of some systems, according to President and CEO Peter Ungaro. Some of the commercial segments Cray is targeting also are pulling back on orders due to outside influences.
And all that was before an incident in a Wisconsin manufacturing facility caused by equipment problems that resulted in smoke damage to some systems that were being tested and readied for shipping. The delivery of those systems will be delayed while Cray engineers fix the damage caused by the smoke.
The impact of all of this was a difficult second quarter and a downward change in the company’s forecast for the rest of the year, all of which Ungaro talked about during a conference call Aug. 2 to discuss the company’s latest quarterly financial numbers. The CEO said that while the cumulative issues have challenged the company in recent months, they all can be overcome and that the company’s strategy is still sound.
“While it is difficult to quantify the precise financial impact of these three issues [the market slowdown, work with third-party chips and the smoke incident] on an individual basis, each of them is significant and ultimately has driven us to revise our outlook for 2016,” Ungaro said during the conference call, according to a transcript on Seeking Alpha. “I do not believe that there’s been any change in the strength of our products and solutions, our competitive position, or in our ability to take additional market share and grow the new markets over time.”
In the second quarter, Cray saw revenue of $100.2 million, a steep drop from the $186.2 million from the same period in 2015. The company lost $13.1 million, compared with the $5.8 million in income a year ago. Officials said they are forecasting $80 million in revenue for the third quarter and $650 million for all of 2016, significantly lower than financial analyst expectations.
Cray is a significant player in the high-performance computing (HPC) and supercomputing space, building systems not only for major research labs but also for large commercial customers. In the latest Top500 list of the world’s fastest systems released in June, Cray had a 19.9 percent share of the total performance of the supercomputers. There were 60 Cray systems on the list—behind Hewlett Packard Enterprise and Lenovo—and five of the top 10 fastest.
However, the various challenges over the first half of the year have caused Cray to stumble, at least in the short term. Company officials early in the year saw customer orders weaken, although they were encouraged by an uptick in the beginning of the second quarter, Ungaro said. However, the quarter ended with weak order activity, and while the CEO said it was difficult to pinpoint exact causes, he had heard similar stories from others in the industry, indicating that “the market seems to be going through a far slower period this year than anticipated.” In addition, he pointed out that IDC analysts recently reduced their expectations for the supercomputing market this year. Ungaro said he expects the slowdown to continue into 2017.
Cray also is being hurt by the continued low prices in the oil industry. The vendor has been pushing into the commercial space, focusing on the energy, manufacturing, financial services and life sciences segments. However, energy is the largest segment, and companies within it have reduced their spending due to the low oil prices.
Cray Swings to Loss, Revenue Decline as Challenges Mount
The company also has been working to integrate new chips into its systems. The work with Intel’s new Xeon “Broadwell” chips has gone smoothly, but there have been technical issues that are being dealt with concerning Intel’s new Xeon Phi 7200 “Knights Landing” processors, which come with up to 72 cores and became generally available in June. Intel expects the chips to be widely adopted in the HPC space to run such emerging workloads as machine learning and artificial intelligence.
“On Knights Landing, we’re continuing to work through technical issues that could impact performance and further impact timing, especially as we scale up to large systems,” Ungaro said. “However, while we continue to work with Intel and their partners to resolve these remaining issues, we began shipping these processors in our XC and CS supercomputers and have been for a couple of months now.”
Regarding Nvidia’s GPUs based on the chip maker’s Pascal architecture, Cray has the graphics cards in-house and is continuing to test them and scale them to get into larger systems.
“We expect to begin receiving these processors in volume shortly, and we plan to begin shipping them to customers for significant deliveries later in the year,” the CEO said. “We’re still behind our original integration schedule here. Ultimately, we expect to work through the remaining issues on each of these processors to achieve the anticipated acceptances before the end of the year.”
The incident with the electrical smoke damaged five smaller customer systems that company officials had expected to be accepted before the end of the year. The cost to the company will be covered by insurance, but it will put it behind schedule because components will need to be reordered, rebuilt and tested, and the impact to the company’s revenues this year could be $20 million to $60 million.
The revenue won’t be lost, Ungaro added, only pushed into 2017.
The various issues overshadowed such gains as new product launches in such areas as compute, storage and analytics, and new customer installations, he said.