EdgeMark Avoids Traps that Snared Silicon Graphics

EdgeMark Avoids Traps that Snared Silicon Graphics

By Bob Starzynski
Staff Writer

The technology community has taken note that EdgeMark Systems Inc., Silver Spring, Md., has grown rapidly into a government information technology wunderkind, thanks to an exclusive reselling agreement with Silicon Graphics Inc.

The same community also is wise to Mountain View, Calif.-based Silicon Graphics' numerous management and financial woes over the past year that have sent its stock price tumbling, its chief executive packing and its profits disappearing.

Because EdgeMark relies so heavily on its relationship with Silicon Graphics, why hasn't the five-year-old company been snared by the same traps as the giant it is shadowing?

EdgeMark photo

Lee Raesly, president
of EdgeMark

"The bottom line is that the problems that SGI had have not affected our market," said Lee Raesly, president of EdgeMark. "If anything, they're strengthening their government work."

EdgeMark, which has been profitable since day one, is expected to ratchet its revenue to $100 million this year, 56 percent over 1996. More impressively, the company's federal business has grown from $3 million in 1995 to $42 million last year, and is projected to double to $80 million this year.

All of that government work, said Raesly, is directly attributable to the company's relationship with SGI. For two years, EdgeMark has been the exclusive provider of Silicon Graphics' desktop workstations and servers through the General Services Administration's schedule.

Raesly would not give other specifics on the Silicon Graphics reselling agreement. He would only say that it is a multiyear agreement that is not about to expire.

SGI has not had as rosy a run as EdgeMark in the past year.

While SGI's revenue has grown at least 25 percent each of the past two years (to $3.7 billion last year), profits have fallen at least 30 percent a year in that time. Last quarter, the company lost $55.5 million, compared with a loss of $21.6 million in the same quarter last year. Consequently, SGI's stock price has fallen near its 52-week low of $12.63, off a high of $30.31. It closed at $13.19 on the New York Stock Exchange on Nov. 21.

SGI announced Oct. 29 that Edward McCracken, chairman and chief executive officer, would step down from the company's top management position. On the same day, Gary Lauer resigned as executive vice president of the company. While SGI did not say that the resignations were due to the company's poor performance, it did issue a restructuring notice the same day. The notice called for the elimination of 700 to 1,000 positions at the company, the streamlining of business, and a new emphasis on the more profitable markets.

In getting back to its core competencies, SGI is doing EdgeMark a favor - focusing on the government market.

"We've decided to re-evaluate our business," said Rick Simmons, regional director for Silicon Graphics. "One of our key areas of focus and investment is the government. It is currently our fastest growing area."

"[SGI has] come to us and asked us to add more resources to the government market," said Raesly. "We will double our sales and federal technical staff in the next six months." The company currently has 100 employees.

Although SGI has had a number of internal problems, the company's products and customer markets have not been a problem. The government user wants SGI's products, so EdgeMark delivers.

"Silicon Graphics can lower their operating costs through sales channels like EdgeMark," said Martin Pyykkonen, an analyst for Furman Selz in San Francisco. "Both companies win."

Pyykkonen agreed that the government market, which currently represents about 10 percent of SGI's business, has a lot of potential. And EdgeMark will keep working to maintain that relationship as long as the reseller has a comfortable niche, he said.

When many companies beef up sales to a particular market, they look for as many possible sales channels as possible. Raesly, however, is confident that SGI will not abandon the exclusivity of its deal with EdgeMark. "If there are four resellers putting proposals together for the same contract, each will be going after the lowest price, not the most comprehensive solution," he said.

Simmons agrees with the importance of the exclusive agreement. "We need someone who is committed to understanding our products," he said. "If a reseller is selling for a wide number of companies, they can't understand the products as well."

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