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Cray reports $54.5 million loss, plans layoff in Chippewa Falls

Large backorders and new product pipeline provide positive outlook

CHIPPEWA FALLS, Wis. – Supercomputer manufacturer Cray Inc. plans to lay off workers at its Chippewa Falls plant in reaction to a second-quarter loss. However, the company has a recorded a significant increased order backlog of $126 million, an increase from its projections of $51 million and up from $75 million in the previous quarter.

Cray reported second quarter revenue of $21.7 million compared to $61.8 million for the same period last year, resulting in a net loss for the quarter of $ 54.5 million

"While we expected the second quarter to be weak, the weakness was compounded by a contract delay for a major order and a continued general slow-down in the defense segment," said Jim Rottsolk, chief executive officer of Cray. "As a result, 2004 revenue will likely be under $200 million. Given both our desire to return to profitability quickly and the opportunity to accelerate progress on the product strategy we announced at last fall's supercomputer conference, we are immediately reshaping our organization."

The company stated that it will reduce its cost structure by about 20 percent; as a result, the company will enter 2005 with quarterly operating expenses no greater than $17 to $18 million.
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Rottsolk further stated, "With our new product set, we are targeting growth in revenue to about $300 million in 2005, not including over $40 million in revenue expected to be deferred. We expect overall gross margin percentage to be in the low to mid 30s. With our new cost structure, we are positioned for solid profitability in 2005 and expect further growth in revenue and profit in subsequent years."

The company intends to lay off over 100 employees worldwide and 27 in Chippewa Falls, said David Kiefer, vice president of produce development and manufacturing, who works at Cray’s Wisconsin facility.

According to Kiefer, the revenue loss was in part due to the delayed development of three new Cray products because of difficulty procuring certain components. Consequently, these products’ validation and subsequent introduction has been pushed back from the third quarter to the fourth of this year.

“We have suppliers and if they don’t come in on a timely fashion we can’t validate the design and introduce [the product] as quickly as possible,” Kiefer said.

Although defense spending is down this year from last for the types of systems Cray manufactures, Kiefer explained the adjustment is not permanent and the company will rebound. This backorder is expected to help realign Cray’s bottom line.

“It’s not a gloom and doom story. We have here new products and a good sales pipeline for those products. We’re confident we will return to profitability in 2005,” Kiefer said.

Three days after the company reported its quarterly results, Cray announced a $3.5 million order for its’ Red Storm Product. “Red Storm” is a 40-TeraOps (40 trillion calculations per second) supercomputer Cray is scheduled to deliver this year to Sandia National Laboratories under a $93 million Department of Energy contract.

Cray announced plans to develop the Red Storm-based product in October 2003. Earlier this year, the company announced advance orders for the product from the Pittsburgh Supercomputer Center, Oak Ridge National Laboratory and an unnamed Canadian customer.

"The Red Storm-based product targets the need for highly scalable microprocessor-based supercomputers with extremely high bandwidth. It is designed to be more efficient and cost-effective for challenging problems and workloads than the clustered SMP systems available in the marketplace today," according to Peter Ungaro, Cray's vice president of worldwide marketing and sales. "Red Storm takes the highly successful MPP systems of the past and updates it with the latest in advanced technology; customers are showing a lot of excitement about Cray bringing this architecture back to the forefront of supercomputing."

Additionally, the company has reported that Beta shipments of the Cray XD1 product (acquired via the OctigaBay acquisition) have begun and the company expects modest revenue from the new product line to begin this quarter. Its’ next generation vector product, the Cray X1E, is expected to generate revenue in the first quarter of 2005.

Pat Oman, executive director of the Chippewa Falls Economic Development Corporation, said although its disappointing to witness job loss in Chippewa Falls, the county has been experiencing overall positive job growth.

“Within the community we have so many expansions in progress right now. In other sectors, like the electronic sector, we see optimistic things lying ahead,” Oman said. “Cray as a private business is doing what it needs to do.”

Many Chippewa Falls businesses, such as TTM Technologies are growing steadily, Oman said. TTM currently employs 1,000 individuals, up 300 from last year, and is projected to continue its growth.

Cray’s Chippewa Falls operations currently employ 280 individuals.

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Kristin V. Johnson is the Associate Editor of WTN. She can be reached at kristin@wistechnology.com.

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