Cray announces Q4 and 2008 results, posts paper loss

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Cray announced its financial results for both Q4 and its fiscal year ended December 31.

Cray logoFor 2008, Cray reported revenue of $282.9 million and a net loss of ($31.3 million), or ($0.96) per share. The results include a $54.5 million non-cash goodwill impairment taken in the fourth quarter; without the goodwill impairment, the company would have been solidly profitable for 2008. For 2007, revenue was $186.2 million and net loss was ($5.7 million), or ($0.18) per share. Gross profit for the year was $111.1 million, surpassing the Company’s previous high of $98.8 million for 2003.

This announcement just kills me, and it’s a good reflection on why I’m not in favor of putting goodwill on the balance sheet.

Cray was, in fact, profitable for all of 2008, and by all accounts had a banner year. In addition to all the debt buy back (which I’ve blogged about before), the company had a 52% year over year growth in revenue (product and service), with a 70% increase in (gross) profit from 2007, and the fourth quarter in a row of rising gross margins (product mix helped here — think CX1). Great news. Another solid indicator of a healthy future (I think) is an increase in R&D

Core operating expenses, consisting of research and development, sales and marketing, and general and administrative expenses, increased to $93.5 million in 2008 from $75.0 million in 2007. The increase was driven primarily by increased research and development and increased variable compensation, including sales commissions, associated with company performance. Included in the 2008 results were $10.2 million for depreciation and amortization and $3.4 million related to stock compensation. Core operating expenses in the fourth quarter 2008 were $27.2 million compared to $21.9 million in the prior year period. The increase was primarily a result of variable compensation [For example, sales commissions. -Ed.]. Included in the fourth quarter 2008 results were non-cash items of $2.2 million for depreciation and amortization and $0.9 million related to stock compensation.

And yet, the balance sheet has to show a loss for the year of $31.3M, because the stock was so badly battered as a result of the financial crisis that the board was forced, under the terms that companies are allowed to carry “goodwill” on their balance sheet, to remove that credit from its balance sheet. CFO Brian Henry, speaking on the earnings call

“For the full year, our reported net loss was $31.3 million or $0.96 per share as a consequence of $54.5 million non-cash goodwill impairment recorded in the fourth quarter. Without the recorded impairment and excluding the gain on the note repurchases, Cray would have had annual net income of $19.1 million as net income.”

Note that this is totally funny money — “goodwill” is not money in the bank. It did not benefit the company in any “real” way (where by “real” I mean in the sense of the checkbook you keep at home) when it was added, nor does it damage the company in any “real” way to remove it. But the paperwork shows a loss, which is a crying shame. To be fair, the goodwill credit goes back a long way, and predates the current leadership team. My vote is that they just walk away from goodwill forever, even if the stock price does recover in the future.

As was discussed on the earnings call (transcript at SeekingAlpha), Q4 results were driven by the Oak Ridge deal, which put $100M on the books. Looking forward, Ungaro anticipates that 2009 will be a little less banner for the company. Cray expects the quarters to be a little less lumpy, revenue-wise, than 2008, and is expecting right now to post a “small operating loss” for the year on revenue at $260M (slightly down from 2008).