SGI Grapples With Cray Acquisition

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SGI Grapples With Cray Acquisition

By Nick Wakeman
Staff Writer

"Cray will help Silicon Graphics move beyond its strong base in the DoD, intelligence agencies and Department of Energy."
-Anthony Robbins
Silicon Graphics

Silicon Graphics Inc. is learning the hard way that it isn't easy to take on a merger and revamp its entire product line at the same time.

The Mountain View, Calif.-based company miscalculated the impact of those actions and saw its earnings drop precipitously.

Through the third quarter of its fiscal 1997 - the nine-month period ended March 31 - the company reported sales of $2.5 billion compared to $1.9 billion for same period a year earlier. But earnings dropped from a $164 million profit to a loss of $24 million.

While analysts praised the combination of Cray's supercomputer systems with Silicon Graphics 3-D workstations, they blamed management snafus for missed delivery dates and shipping schedules that resulted in lower earnings.

Anthony Robbins, vice president of the company's government sector, acknowledged that Silicon Graphics miscalculated the impact of the changes in the product lines and pulling the two companies together. According to Robbins, it took a year for the
company to put most of Silicon Graphics and Cray Research under a single management umbrella, and that process is still continuing.

In May, all product divisions from desktops to high-performance computing systems, as well as manufacturing, were placed under Robert Ewald, Cray's chief operating officer and president.

The company has not reported earnings since Ewald took the post of executive vice president of computer systems. The company's fourth quarter ended June 30, and results for the quarter and the year should be released in the coming weeks, Robbins said.

Doug Van Dorsten, an analyst with the market research firm Hambrecht & Quist, San Francisco, applauded the company's decision to move all product lines and manufacturing under Ewald.

Since the acquisition, "the operating results have been disappointing, but that has mostly been on the Silicon Graphics side and not Cray," he said.

Silicon Graphics is showing signs of turning around, although analysts are taking a wait-and-see approach. The company missed earnings projections for seven quarters, said Henry Voskoboynik, an analyst with the market research firm Chicago Corp., New York.

"There have been problems with execution and management but [the fourth] quarter should be very good," he said. He noted that the fourth quarter last year was dismal, so a positive comparison would be easy.

The introduction of a new product line in October had a bigger impact on the bottom line than anticipated, according to analysts and company officials.

"We have always prided ourselves on a new product line every 18 to 22 months," said Robbins, who has been with Silicon Graphics for eight years. With the addition of Cray, Silicon Graphics released new lines of Cray's supercomputing systems and new lines of Silicon Graphics 3-D workstations.

But replacing product lines gets more complicated the larger a company gets, Robbins said. "It is not as easy as when we were making $400 million a year," he said.

The company failed to adequately forecast the demand for the new products, which resulted in the missed delivery schedules, Robbins said.

"When you announce a new product line, you have to have it ready when you say you will," he said. Applications by the company and its vendors have to be ready, and the company has to be prepared to support the customer's transition from the old product to the new ones, Robbins said.

"We have a better understanding of that now," he said.

The company also is not as likely to be as aggressive in turning over its product lines in the future, he said. The company has earned a reputation as a provider of leading-edge technology, but "our customers also expect a strong, sound business partner," Robbins said.

The April 1996 acquisition of Eagan, Minn.-based Cray, which was valued at $766 million, was a bright spot for Silicon Graphics last year, analysts said.

"Cray has not been a drag on earnings," said Daniel Kunstler, an analyst with J.P. Morgan, San Francisco.

Silicon Graphics had long been interested in getting into the markets where Cray dominated, such as high-end supercomputers, said Van Dorsten.

"For SGI to be a dominant player in those markets would have taken a long time [without buying Cray]," Van Dorsten said.

The addition of Cray will help Silicon Graphics move beyond its strong base in the Department of Defense, intelligence agencies and Department of Energy, Robbins said.

He oversees more than $500 million in annual revenues from the government. Silicon Graphics also takes in another $150 million from the government through other divisions, he said.

Cray's share of Silicon Graphics' government business is probably more than $200 million annually, Robbins said.

"We can now offer a significant amount of value-added hardware that neither company could do separately," he said.

The company combined the sales force of Cray and Silicon Graphics to push products that range from workstations to supercomputers, said Lynne Corddry, Silicon Graphics director of federal business development.

One significant win for the company was the Department of Defense's high-performance supercomputer modernization project at four of its research centers, she said. Each center awarded a separate contract, and both Silicon Graphics and Cray were bidding as subcontractors when the companies merged.

The Department of Defense "gave us a month to come up with a combined solution [after the merger]," Corddry said. "That really pushed us to collaborate."

Silicon Graphics is a subcontractor on all four contracts, each of which are valued at $170 million, Robbins said. A conservative estimate of the value to Silicon Graphics is more than $200 million over the four contracts, he said. The contracts are for about eight years, including options.

The company wants to concentrate more on large government projects, Robbins said. And while the government is Silicon Graphics' largest market segment, "there are a lot of people in the government that don't know our story right now," he said.


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