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Cray updates investors on DARPA work; $60M reduction could boost balance sheet

Cray filed a form 8-K with the SEC today, updating investors on the status of work related to DARPA’s HPCS program.

The 8-K is a general form and is used to notify investors or the SEC of significant, unscheduled events. Other reasons that a company might file an 8-K include the election or departure of a named officer or director, layoffs, issuing bonds, change in accountants — that sort of thing (you can read more about the Form 8-K here if you are really into the operations of public companies).

Here is the text from Cray’s filing

Cray logoOn February 18, 2010, we were notified by the Defense Advanced Research Projects Agency (“DARPA”) that we had completed Milestone 6 under our recently-amended DARPA Phase III High Productivity Computing Systems program agreement. The milestone was for $12,500,000 and, based on our level of spending for DARPA-related work, all of the milestone amount will be credited against our research and development expenses in the first quarter of 2010 as part of this co-funding arrangement.

Additional information regarding our agreement with DARPA, as amended, can be found in our report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2010.

That filing from the 16th provides more detail about the modification to Cray’s HPCS program that Cray included in its announcement of preliminary 2009 results in January. Here is what Cray had to say

On February 10, 2010, we entered into an amendment to our agreement covering Phase III of the Defense Advanced Research Projects Agency’s (“DARPA”) High Productivity Computing Systems (“HPCS”) program. This amendment reduces the program’s scope by removing certain committed elements of Intel and Cray technologies from our development project, reduces the amount of DARPA’s total financial commitment, revises milestones and establishes new estimated payment dates and amounts.

And here is the financial impact

The Amendment included a decrease of $60,000,000 in DARPA’s financial commitment, from a previous total of $250,000,000 to $190,000,000 and the minimum Cumulative Total Spending under our contract has been reduced to $285,000,000 from $375,000,000. The remaining DARPA payments to us are subject to our achievement of milestones and are targeted to be made, if the milestones are met, in the amounts and in the estimated years set forth above. The Amendment does not affect our obligation to spend an amount of no less than one-third (1/3) of the Cumulative Total Spend.

The cumulative spend language there refers to the fact that at the beginning of the HPCS program DARPA and Cray agreed that each phase in the project would cost $X, with no less than 1/3 of that to be paid for by Cray, and the rest reimbursed from DARPA (a partnership). If the cumulative total spend falls behind schedule, then DARPA can delay or modify payments, as set forth below

Under our agreement, our cumulative contribution share for Phase III (the amount we spend for related work over and above the amounts provided by DARPA) and the Government Share Contribution (together, the “Cumulative Total Spending”) must meet minimum Cumulative Total Spending levels associated with each milestone review.  If the Cumulative Total Spending is less than the minimum threshold for that milestone review, as specified under our agreement, we are to estimate a date when the spending threshold will be met. Based on this estimate, DARPA may delay the milestone review until after the spending threshold is achieved.

We don’t know exactly what happened, and Cray hasn’t wanted to comment, but reading this it looks like Cray changed the design, which changed the total cumulative spend of the project. Since DARPA is paying 2/3 of that spend, a change in the amount of the spend means a change in the payments. The way to think about this project is like a time and materials contract where Cray recovers 2/3 of the cost from DARPA and kicks in 1/3 of its own dollar (obviously in the hope that it will recoup those R&D costs either through direct sales of the resulting product or by incorporation of key technologies into intermediate products). The $60M reduction goes to the top line (gross revenue), but could actually increase profit, since that revenue was cost recovery only (no profit) AND Cray is released from the obligation to spend and additional $30M on R&D (DARPA reimburses 2/3 of the total cost, so that $60M is only part of the $90M total cumulative spending reduction).

Net-net: this could actually help Cray’s balance sheet.

Before the recent amendment Cray had met five milestones and has gotten $97.5M in payments from DARPA; after the amendment there are 7 milestones remaining, with the last scheduled for 2012. At that time Cray is supposed to have a multiple sustained PFLOPS machine available for mission partners to play with for six months

Under our agreement with DARPA, we are to develop a prototype system that demonstrates the functionality required for scaling to multiple sustained petaflops (1,000 trillion floating point operations per second) levels of performance on real applications. Based on our Adaptive Supercomputing vision, our proposed system involves a new hybrid system architecture that combines advanced processor technologies, a new high-performance network and an adaptive software layer into a single integrated system. In addition to the final prototype demonstration, we are to also perform a number of technology demonstrations throughout the program to exhibit progress in key areas that the prototype system is dependent on. If completed, we will own the prototype system and will provide our mission partners access to the prototype system for a period of six (6) months following the demonstration of the prototype system.

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  1. […] was news when Cray didn’t make an HPCS milestone (although as I pointed out was potentially a good thing for the company), so symmetry insists that it is news when they make […]

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