SGI Still Feels Effects of Government Shutdown

Officials with the HPC systems maker say revenues in the latest quarter and for the rest of the fiscal year will be hurt by the shutdown last fall.

SGI continues to feel the impact of the Congress' highly partisan budget debates, with officials at the high-performance computing vendor saying that the government shutdown last fall will hurt fiscal second-quarter numbers and impact the company through the rest of the fiscal year.

Company executives said Jan. 14 that SGI generates a lot of revenue from government contracts as well as deals with organizations that get government funding. While the systems vendor's core businesses in high-performance computing (HPC), big data, storage and services saw revenues grow in the second quarter—which ended Dec. 27—sales in its federal business unit were down $21 million from the same period in 2012.

According to preliminary numbers released Jan. 14, revenues for SGI's federal group in the quarter were $44 million, compared with $65 million during the previous fiscal second quarter and $76 million from the prior quarter. Remove the federal business, and revenues for SGI's HPC, big data, storage and services hit $63 million, up 7 percent from the previous year and 14 percent from the prior quarter. President and CEO Jorge Titinger attributed the growth to the company's focus on offering solutions that integrate HPC and big data capabilities.

"As expected, our results in the fiscal second quarter were impacted by the government shutdown and its after-effects," Titinger said in a statement. "We expect to achieve strong growth in core revenue and greater profitability in the second half of our fiscal year. However, this growth likely will be less than originally expected due to near-term delays in certain federal programs."

The hope is that with a new federal budget being agreed upon, federal agencies will finally have a better idea of their long-term spending capabilities, he said. "We therefore remain positive on the long-term outlook for growth, based on increasing traction with enterprise and international customers, increasing penetration of new agencies and departments within the federal government, and an eventual return to historical spending levels for most current federal customers," Titinger said.

However, the federal business could still be a drag on the company's numbers in the second half of its fiscal 2014. Revenue for the second half will be $260 million to $300 million, with the core businesses—excluding the federal unit—growing at least 30 percent over the second half of the previous fiscal year. Add in the federal business, and revenues will be flat to up 10 percent.

Titinger warned in October 2013 that the partial government shutdown would hurt revenues for the entire fiscal year, saying at the time that the shutdown was only one in a series of federal budget crises that impacted SGI.

"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 [fiscal first] quarter," he said during a conference call to discuss that quarter's results. "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."

Forrester Research analysts in October 2013 said the shutdown and other budget issues—including the sequestration and the threats by Republican lawmakers last year not to raise the country's debt ceiling—convinced them to reduce their IT spending growth projections for the U.S. tech market for 2013 from 5.7 percent to 3.9 percent.

SGI's announcement came a week after officials with supercomputer-maker Cray said preliminary 2013 financial results will come in at about $520 million, in line with what they had expected earlier in the year. They also said they expect 2014 revenues to grow to about $600 million.

"We had a great year, highlighted by strong revenue growth in both supercomputing and big data," Cray President and CEO Peter Ungaro said in a statement Jan. 6.