Supercomputer maker SGI is feeling the impact of the government shutdown and the looming threat around the debt ceiling.
SGI executives told analysts and journalists Oct. 10 that sales and profits for the most recent financial quarter were hurt by the partial government shutdown, and that revenues for the current fiscal year—which will end in June 2014—could fall by as much as 10 percent due to the shutdown and related impacts, most of which will be felt through the end of the current calendar year.
The shutdown essentially halted business with the federal government, including the freezing of funds related to a $12 million deal SGI’s Federal unit had in the works with an agency in the intelligence community, according to President and CEO Jorge Luis Titinger. In addition, the shutdown means that federal employees who SGI works with on business projects cannot answer phone calls or emails from vendors. That, combined with the uncertainty surrounding the shutdown and debt ceiling debate, makes it difficult for SGI executives to get a clear view of part of the company’s financial future.
In a conference call to talk about the preliminary quarterly financial results, Titinger noted that the company has had to learn how to deal with the uncertainty caused by the various budget crises in Washington, D.C., but that the latest situation has proven particularly difficult.
“In our Federal business, we had anticipated some amount of disruption in customer decision making on funding, leading up to the expiration of the continuing resolution on Sept. 30,” he said. “Over the past nine months, we have been through two similar deadlines with the fiscal cliff and the sequester, and given this experience, we had assessed the risks to revenue and pursued appropriate actions to recognize our revenue targets for the quarter. However, like most of the business community, we did not expect that the government would shut down, nor did we anticipate a complete halt to all transaction activity that occurred in the final few days just before the shutdown.”
Much of the government shut down Oct. 1 after Republican congressional leaders were unable to convince the Obama Administration to dismantle or delay the Affordable Care Act (ACA) and refused to vote for a continuing resolution to keep funding the government. Republicans also are threatening to refuse to raise the country’s debt ceiling if some of their demands around the ACA or spending are not agreed to.
SGI generated $147 million in revenue for the most recent quarter, which ended Sept. 27, down from the $160 million to $170 million company officials in August forecast. They had projected full-fiscal-year revenues to hit about $760 million, but said that they now expect revenues to come in 10 percent below that.
SGI Financial Numbers Hurt by Government Shutdown
SGI’s Federal business has a significant number of government customers, including the Department of Homeland Security, the Department of Defense, the Army and Air Force, and the Department of Energy. About half of SGI’s business comes from the U.S. government.
The shutdown also comes as SGI moves away from its legacy cloud infrastructure business to focus on higher-margin efforts, including high-performance computing, big data and storage. Titinger said he was pleased with the growth in those areas.
“However, the opportunities we’re pursuing are generally large deals with long sales cycles and lengthy acceptance criteria,” he said. “Close to half of the pipeline is inside Federal, which currently has limited visibility. Although most of the projects we are involved with are considered mission-critical, we have seen unprecedented halts to programs over the past week. For example, the GEOINT Conference, the largest tech gathering that serves the intelligence community, was canceled for the first time in its 10-year history with only one week’s notice.”
How hard SGI is impacted will depend on how long the shutdown lasts, and whether the debt ceiling is raised, the CEO said. Economists, financial analysts and many government leaders have said that a failure to raise the debt ceiling—thus forcing the United States to default on its debts—could have significant and widespread effects not only in the United States, but worldwide.
In an Oct. 7 post on the Forrester Research blog, analyst Andrew Bartels wrote that the “U.S. economy would almost certainly decline in Q4 2013 and Q1 2014, with potentially continued declines or at best weak growth in the rest of the year. Should this happen, U.S. tech spending would fall in 2014, with poor prospects after that.”
Answering an analysts’ question, Titinger said it was difficult to say how long the company would feel the negative impacts from the partial shutdown, but that time was a key factor.
“The longer this goes out without resolution, the harder the impact,” he said. “I view this almost as having brought a freight train to a dead stop in a hurry and then having to restart it. It doesn’t go up to its speed velocity immediately, right? And so we’re hopeful that this gets resolved pretty quickly.”