Cray Reports 2004 Financial Results; Company Receives Large Order from

Cray Reports 2004 Financial Results; Company Receives Large Order from Oak Ridge National Laboratory

    Business Editors

    SEATTLE--(BUSINESS WIRE)--Feb. 3, 2005--Global supercomputer leader Cray Inc. (Nasdaq:CRAY) today reported financial results for the quarter and year ended December 31, 2004.
    Revenue for the full-year 2004 was $148.9 million, compared to $237.0 million for 2003. GAAP operating loss for the year was ($144.3) million, compared to operating income of $19.1 million for the prior year. GAAP operating loss for 2004 includes $27.0 million of unusual items associated primarily with restructuring, write-down of excess inventory, and adjustments recognized on a fixed-price contract. Non-GAAP(1) operating loss, which includes unusual items but excludes OctigaBay acquisition-related charges of $55.6 million, was ($88.8) million for the year.
    GAAP net loss for the year was ($206.3) million, compared to net income of $63.2 million for the prior year. Results for both years were significantly affected by changes in the treatment of a federal income tax net operating loss carry forward.
    Product gross margins for the year were significantly lower than 2003 due primarily to limited Cray X1 system sales, low margin engineering contract revenue, adjustments recognized on a fixed-price contract, and charges related to excess inventory and unabsorbed overhead. As planned, service revenue for the year was $49.7 million -- compared to $62.0 million in 2003 -- while service gross margins increased year-over-year to 38.9%, up from 34.2%.
    The Company reported operating expenses of $93.1 million for the year, compared to $75.7 million in the prior year. Operating expenses were higher than planned, particularly in the second half of the year, due to the cost of developing new products, the cost of implementing Sarbanes-Oxley compliance initiatives, and sales and marketing expenses associated with the ramp of three new products.
    The Company reported revenue for the fourth quarter of $39.2 million. GAAP net loss for the period, including unusual items, was ($36.9) million, or ($.42) per share. Non-GAAP net loss for the period, which also includes unusual items, but excludes charges related to the acquisition of OctigaBay, was ($29.7) million, or ($.34) per share. Unusual items in the quarter consisted of $4.2 million of additional adjustments to a fixed-price contract and $1.0 million of restructuring charges.
    In December, the Company announced the successful completion of an $80 million Rule 144A offering of 3% convertible senior subordinated notes -- net proceeds were approximately $76.6 million. The Company ended the year with $87.4 million in cash and short-term investments.
    "Given limited Cray X1 system business, coupled with delays in new product introductions, 2004 was clearly a difficult year financially," said Jim Rottsolk, Chairman and CEO of Cray Inc. "Nevertheless, we achieved a number of important milestones critical to positioning Cray for long-term success. We introduced three new products, diversifying our product portfolio and significantly increasing our addressable market. We made major changes in the Company from top to bottom, with four new directors, important changes in senior management and a restructuring of our work force. We look to the challenges ahead with confidence."

    Outlook

    "We enter 2005 with the strongest High Performance Computing (HPC) portfolio in the industry. We have a real opportunity to grow the business and further demonstrate with customers the value of systems purpose-built for HPC," said Rottsolk. "We have set very aggressive targets for ourselves in 2005. While it is clear we will grow product revenue substantially over 2004, with several large opportunities currently in play, it is premature to provide specific guidance at this time. For example, today we received an order valued at over $30 million to continue building the Department of Energy's National Leadership Computing Facility at Oak Ridge National Laboratory. We are presently in the midst of a production ramp and are focused on getting our new products into and accepted by the market. Given the timing of deliveries and acceptances of large systems, we expect 2005 quarterly results to be uneven."
    Rottsolk continued, "Our near-term goal in 2005 is to drive top-line growth with our three new products and to execute operationally. We are working hard to improve product stability, increase margins, and keep operating expenses as low as possible."
    "We our confident we will achieve our long-term goal of top-line growth and sustained profitability. Critical to this strategy is continued progress on key new product development coupled with execution on the operating and sales fronts," added Rottsolk.

    Recent Highlights

--	Shipped the first Cray X1E supercomputer on schedule to ICM Poland in December and announced several Cray X1E system orders from undisclosed customers around the world.
--	Launched the Cray XT3 supercomputer -- early customers include Oak Ridge National Laboratory, Pittsburgh Supercomputer Center and a number of undisclosed customers.
--	Announced new Cray XT3 system orders from U.S. Army Corps of Engineers and Japan Science and Technology Agency.
--	Increased success with the Cray XD1 system -- recently announced customer wins include FZJ's Central Institute for Applied Mathematics in Germany, the Zuse Institute Berlin (ZIB), and the National Institute of Nuclear Physics (INFN) in Italy.
--	Cray continued to build its network of channel partners by adding new partners in the European market.
--	Appointed industry veteran Mamoru Nakano as President of Cray Japan.
--	Completed $80 million rule 144A offering of 3% convertible senior subordinated notes.
--	Added John B. Jones, Jr. to the Cray Board of Directors, following other key recent appointments to the Board.

    Investor Conference Call

    Management will discuss results and the Company's outlook followed by a question and answer session for investors today, February 3, 2005, at 2:00 p.m. Pacific time (5:00 p.m. Eastern time). The call in number is 800-218-0713. International callers should dial 303-262-2141. If you are unable to participate, a replay will be available from 5:00 p.m. Pacific time February 3, 2005, for 48 hours. To access, dial 800-405-2236, or 303-590-3000 (international) -- enter access code 11021071#. The conference call will be webcast live and archived for 360 days. To access the webcast go to the Investors section of the Cray website at http://investors.cray.com.

    About Cray Inc.

    As the global leader in high performance computing (HPC), Cray provides innovative supercomputing systems that enable scientists and engineers in government, industry and academia to meet both existing and future computational challenges. Building on years of experience in designing, developing, marketing and servicing the world's most advanced supercomputers, Cray offers a comprehensive portfolio of HPC systems that deliver unrivaled sustained performance on a wide range of applications. Go to www.cray.com for more information.

    (1) All non-GAAP numbers have been adjusted to exclude certain items. Reconciliations of adjustments to GAAP results are included in the table below "Non-GAAP Consolidated Condensed Statements of Operations."

    Safe Harbor Statement

    This press release contains forward-looking statements. There are certain factors that could cause Cray's execution plans to differ materially from those anticipated by the statements above. These include the technical challenges of developing high performance computing systems, fluctuating quarterly operating results, lower margins and earnings due to significant pricing pressure and new product introduction expenses, government support and timing of supercomputer system purchases, the successful porting of application programs to Cray computer systems, reliance on third-party suppliers, Cray's ability to keep up with rapid technological change, Cray's ability to compete against larger, more established companies and innovative competitors, and general economic and market conditions. For a discussion of these and other risks, see "Factors That Could Affect Future Results" in Cray's most recent Quarterly Report on Form 10-Q filed with the SEC.

    Cray is a registered trademark, and Cray X1, Cray X1E, Cray XT3 and Cray XD1 are trademarks, of Cray Inc. All other trademarks are the property of their respective owners.

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Unaudited

Three Months Ended Year Ended December 31, December 31, 2003 2004 2003 2004 --------- --------- --------- ---------- REVENUE: Product $ 52,754 $ 26,523 $175,004 $ 99,236 Service 14,474 12,636 61,958 49,692 --------- --------- --------- ---------- Total revenue 67,228 39,159 236,962 148,928 --------- --------- --------- ---------- OPERATING EXPENSES: Cost of product revenue 29,647 31,994 97,354 107,083 Cost of service revenue 10,005 7,071 40,780 30,345 Research and development 9,391 12,322 37,762 44,875 Marketing and sales 8,605 8,100 27,038 32,176 General and administrative 3,206 4,834 10,908 16,054 Acquisition-related deferred compensation - 6,900 - 11,134 In-process research and development charge - - - 43,400 Restructuring costs 4,019 1,047 4,019 8,176 --------- --------- --------- ---------- Total operating expenses 64,873 72,268 217,861 293,243 --------- --------- --------- ---------- Income (loss) from operations 2,355 (33,109) 19,101 (144,315)

OTHER INCOME (EXPENSE), NET 465 (319) 1,496 (430)

INTEREST INCOME, NET 175 89 444 428 --------- --------- --------- ---------- Income (loss) before income taxes 2,995 (33,339) 21,041 (144,317)

PROVISION (BENEFIT) FOR INCOME TAXES (42,735) 3,582 (42,207) 61,950 -------- --------- --------- ---------- Net income (loss) $ 45,730 $(36,921) $ 63,248 $(206,267) ========= ========= ========= ========== Net income (loss) per common share: Basic $ 0.63 $ (0.42) $ 0.94 $ (2.47) ========= ========= ========= ========== Diluted $ 0.56 $ (0.42) $ 0.81 $ (2.47) ========= ========= ========= ========== Weighted average shares outstanding: Basic 72,098 87,316 67,098 83,387 ========= ========= ========= ========== Diluted 81,754 87,316 77,861 83,387 ========= ========= ========= ==========

CRAY INC. AND SUBSIDIARIES

NON-GAAP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Excluding adjustments itemized below (in thousands, except per share data) Unaudited

Three Months Ended Year Ended December 31, December 31, 2003 2004 2003 2004 --------- --------- --------- ---------- REVENUE: Product $ 52,754 $ 26,523 $175,004 $ 99,236 Service 14,474 12,636 61,958 49,692 --------- --------- --------- ---------- Total revenue 67,228 39,159 236,962 148,928 --------- --------- --------- ---------- OPERATING EXPENSES: Cost of product revenue 29,647 31,635 97,354 106,066 Cost of service revenue 10,005 7,071 40,780 30,345 Research and development 9,391 12,322 37,762 44,875 Marketing and sales 8,605 8,100 27,038 32,176 General and administrative 3,206 4,834 10,908 16,054 Restructuring costs 4,019 1,047 4,019 8,176 --------- --------- --------- ---------- Total operating expenses 64,873 65,009 217,861 237,692 --------- --------- --------- ---------- Non-GAAP income (loss) from operations 2,355 (25,850) 19,101 (88,764)

OTHER INCOME (EXPENSE), NET 465 (319) 1,496 (430)

INTEREST INCOME, NET 175 89 444 428 --------- --------- --------- ---------- Non-GAAP income (loss) before income taxes 2,995 (26,080) 21,041 (88,766)

PROVISION (BENEFIT) FOR INCOME TAXES (42,735) 3,582 (42,207) 64,901 -------- --------- --------- ----------

Non-GAAP Net income (loss) $ 45,730 $(29,662) $ 63,248 $(153,667) ========= ========= ========= ========== Non-GAAP Net income (loss) per common share: Basic $ 0.63 $ (0.34) $ 0.94 $ (1.84) ========= ========= ========= ========== Diluted $ 0.56 $ (0.34) $ 0.81 $ (1.84) ========= ========= ========= ========== Weighted average shares outstanding: Basic 72,098 87,316 67,098 83,387 ========= ========= ========= ========== Diluted 81,754 87,316 77,861 83,387 ========= ========= ========= ==========

An itemized reconciliation between net income (loss) on a GAAP basis and non-GAAP basis is as follows:

GAAP net income (loss) $ 45,730 (36,921) 63,248 $(206,267)

Other costs and expenses: Amortization of purchased intangibles - 359 - 1,017 Acquisition-related deferred compensation - 6,900 - 11,134 In-process research and development charge - - - 43,400 -------- --------- --------- ---------- Total non-GAAP adjustments to net income (loss) - 7,259 - 55,551

Income tax effect - - - (2,951)

Non-GAAP net income (loss) $ 45,730 $(29,662) $ 63,248 $(153,667) ========= ========= ========= ==========

CRAY INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) Unaudited

December 31, December 31, 2003 2004 ASSETS ------------ ------------ Current assets: Cash and cash equivalents $ 39,773 $ 46,692 Short term investments, available for sale 34,570 40,730 Accounts receivable, net of allowance of $1,125 in 2003 and $1,439 in 2004 48,474 31,452 Inventory 43,022 71,374 Prepaid expenses and other assets 18,932 7,267 ---------- ---------- Total current assets 184,771 197,515

Property and equipment, net 26,157 36,679 Service spares, net 4,925 3,590 Goodwill 13,344 55,536 Intangible assets - 6,197 Deferred tax asset 58,595 - Other assets 3,797 7,915 ---------- ---------- TOTAL $ 291,589 $ 307,432 ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 12,553 $ 23,565 Accrued payroll and related expenses 19,035 15,045 Other accrued liabilities 3,480 8,090 Deferred revenue 33,233 54,514 Warranty reserves 655 - ---------- ---------- Total current liabilities 68,956 101,214

Deferred tax liability 1,647 Notes payable 80,000

Shareholders' equity: Common stock, par $.01 - Authorized, 150,000,000 shares; issued and outstanding, 72,601,016 and 87,348,641 shares, respectively 312,646 415,395 Exchangeable shares, no par value, unlimited shares authorized, 570,963 shares outstanding - 4,173 Deferred compensation (105) (4,220) Accumulated other comprehensive income (loss) (807) 4,591 Accumulated deficit (89,101) (295,368) ---------- ---------- 222,633 124,571 ---------- ---------- TOTAL $ 291,589 $ 307,432 ========== ==========

--30--APS/se*

CONTACT: Cray Inc. Victor Chynoweth, 206/701-2280 victorc@cray.com

KEYWORD: WASHINGTON INDUSTRY KEYWORD: HARDWARE EARNINGS CONFERENCE CALLS SOURCE: Cray Inc.

Copyright Business Wire 2005