Silicon Graphics' New Machines Target Turnaround Desktops Aim At Government Niche

Silicon Graphics' New Machines Target Turnaround
Desktops Aim At Government Niche

By Richard McCaffery
Staff Writer

Silicon Graphics Inc. executives hope to reverse the company's sinking fortunes by bringing its powerful graphics to a new line of desktop computers aimed at government and other core customers.

The new visual personal computer product, scheduled to be available this fall, will be targeted to six areas: communications, energy, entertainment, government, manufacturing and science.

It will run on Microsoft's Windows NT operating system and microprocessors from Intel Corp., Santa Clara, Calif.

The 3D graphics and price tag of the new product - about $5,000 - should win back lost business, company officials said. The company has lost low-end business to aggressive competitors and high-end workstation business to Hewlett-Packard and others that offered cheaper computers that use Windows NT and Intel chips.

"It's going to be more competitive than any desktop offering SGI has ever had," said Anthony Robbins, vice president of the company's Calverton, Md.-based government division. "We're going to bring some really innovative technology to the market."

"Think about the performance of a $30,000 SGI computer delivered by a PC in the $5,000 price range. You're going to be blown away." -Anthony Robbins

The company needs a quick return to profitability. On March 31, SGI announced net losses of $153 million, or 81 cents a share, for its third quarter. This includes $114 million in restructuring charges.

Third quarter revenues were $708 million, 22 percent lower than the same period a year ago. Much of that loss can be traced to depressed sales of SGI's workstations and computers.

But SGI's new machines should appeal to government and commercial customers alike, company officials said.

"Think about the performance of a $30,000 SGI computer delivered by a PC in the $5,000 price range," Robbins said. "You're going to be blown away."

The new product will at least double the size of SGI's addressable market in the government, said Robbins, who declined to disclose sales figures for the company's government business or quantify the size of its federal operations.

Doug Van Dorsten, a research analyst at Hambrecht & Quist Group, a financial services company in San Francisco, said government business generates 15 percent to 20 percent of SGI's annual revenue.

In the last 18 months, the government has become SGI's second-largest market thanks to big contracts from agencies such as NASA and the departments of Defense and Energy, Robbins said.

The Department of Energy, for example, is using graphic-rich SGI computers to simulate nuclear explosions and analyze the effects of aging on nuclear weapons. SGI won the contract, worth about $100 million, in 1996, Robbins said.

The company is also a subcontractor for the Department of Defense, which is modernizing its computer systems. The DoD contract is worth about $200 million

Despite its troubles, SGI has built up about $780 million in cash reserves - almost twice as much as it had in 1996 - and its government unit has grown to about 300 employees. SGI officials already have talked to the Navy, Air Force, Army and NASA about the new product, and Robbins said he is optimistic about the response.

The government buys less than 100,000 high-end computers that use the Unix operating system, but it buys more than 500,000 standard desktop computers, Robbins said.

Still, the government market for desktop computers is just as competitive as the commercial sector, analysts said.

And they said SGI will have to differentiate itself from players such as Dell Computer Corp., Round Rock, Texas, and Compaq Computer Corp., Houston, which have stolen away a chunk of SGI's low-end computer business.

At least one SGI customer is eager to find out if the company can deliver 3D graphics in a less expensive box.

Gil Weigand, deputy assistant secretary for strategic computing and simulation at the Department of Energy, said, "The untapped frontier in computer research and development is high-end graphics at the desktop.
"I don't have any reservations about companies going into that marketplace," Weigand said. "It will accelerate development ... My biggest concern is that SGI stays competitive and profitable. If they're not, I won't be able to tap into their high-end computers."

Some analysts wonder if SGI can make the transition.

"It's going to be really tough," said Richard Chu, managing director at Cowen & Co., a New York-based investment and financial services company."They can't hold anything back. They have to be as aggressive as Compaq and Dell."

And they have to prove they can mass-produce computers that offer the razzle-dazzle graphics SGI's customers are used to, Chu said.

It has long sold high-end computers to scientists, engineers and others in technical fields, and its computers are being used to create the special effects for the new "Star Wars" movies.

"They stayed with their knitting too long," said George Elling, senior vice president at New York-based Lehman Brothers Holdings Inc. "The company did not act quickly enough to expand out of its niche market."

SGI posted net losses totaling $240 million for the first nine months of fiscal 1998, due in part to restructuring charges aimed at streamlining operations. Net income dropped from $115 million in 1996 to $78 million in 1997. And in October 1997, the company announced plans to cut about 800 jobs, almost 10 percent of its work force.

The company also is spinning off its chip-making division, a move company officials say will allow SGI to focus on its software and system design.

Hambrecht & Quist's Van Dorsten likes SGI's new strategy and does not view it as an effort to save a failing company.

"I think it's a little overblown to say this move is needed to save the company," Van Dorsten said. "Just three years ago they sold everything they built. They couldn't spend the money fast enough. ... This is a company that historically has had good products, a loyal customer base and virtually no internal controls."

But Lehman Brothers' Elling said the jury is still out.

"They have to prove they have the right products, the right technology and the right people to sell those products," he said.