Do or die for SGI

SGI’s latest facelift may be its last


Fresh off its 20-year anniversary, money-losing Silicon Graphics Inc. says it knows where the future is. This is another makeover for the Mountain View-based company, which Hoover’s Inc. describes as having had more facelifts than Michael Jackson.

Like IBM, Hewlett-Packard Co., Sun Microsystems Inc. and Apple Computer Inc., SGI hopes for a comeback featuring the market demand for cost efficiency and low-cost Linux to expand its stronghold of high-margin servers and supercomputer clusters to scientific and engineering research.

“We are 100 percent focused on science and engineering,” says SGI CEO Bob Bishop. “We live or die on what we do in that space. Plan B is Plan A. We have no backup.”

SGI has not earned a quarterly profit since June 1999. Recently, it reported a loss of 8 cents a share for the second quarter ended Dec. 31 on revenue of $263 million, down from a loss of 2 cents a share the previous year. That’s much better than the 13 cent loss the Street had expected, according to Thomson Financial/First Call. Analysts expect the company to lose 10 cents a share in the current quarter.

“With a cash burn rate of $20 million in the [current] quarter, a revenue pickup is clearly needed in 2003,” says Buckingham Research Group analyst Jay Stevens, noting that on the positive side, the company is lean with a gross margin of between 42 and 43 percent.

At LinuxWorld in New York earlier this year, SGI won the “Best of Show” award for its system that pairs Santa Clara-based Intel Corp.’s 64-bit Itanium chips with its Altix 3000 family of servers and superclusters. Altix 3000 machines are set to ship in March and sales may appear in the company’s results in June.

Trim and focused, SGI is hoping its 3-year-old Linux initiative is more successful than past flirtations and failures in high-end personal computers, video game chips, streaming media, 3-D animation software, Hollywood special effects and computer graphics cards.

Under Bishop’s leadership since 1999, SGI has quit its consumer products business, killed off all software operations not linked to its operating system and either sold or closed down its enterprise operations, resulting in pink slips to thousands of employees since 1998.

“We have a tight mission to be the unchallenged supplier of tools to scientists and researchers,” Bishop says, pursuing a market that he estimates is worth $15 billion.

Growth is possible because SGI has only tapped about 10 percent of the higher-margin scientific technology and engineering market. It wants to conquer industries dependent on researchers such as defense, biotechnology and Linux-based computing.

Sales to the defense industry make up about one-third of SGI’s projected fiscal year revenue of $1.3 billion, up from 25 percent in 1989 when many high tech companies abandoned defense for the Internet.

On Jan. 28, SGI unveiled its most recent defense deal with Lockheed Martin Naval Electronics & Surveillance Systems of Akron, Ohio, to double the number of SGI-built F-16 Mission Training centers to 10. Both companies say it is a multi-million dollar deal, but its exact worth won’t be
determined until the custom systems are installed. Each system is expected to exceed $1 million.

SGI’s CEO is content to let bigger fish fight over the consumer market.

“PCs just run out of horsepower,” he says. “Local defense labs waste billions of dollars a year on inefficient computing. We don’t give a damn about the $1 trillion consumer PC market. Let Dell and HP fight it out in that market, which is a commodity anyway.”

Only time will tell if SGI, known for the high-powered computers behind the blockbuster movie “Jurassic Park,” will finally turn a profit or go the way of dinosaurs.