SGI Looks to Regain Its Once-Dominant Foothold

SGI Looks to Regain Its Once-Dominant Foothold<@VM>SGI Table

Robert Bishop

By Nick Wakeman, Senior Editor

After spending a year getting back to its supercomputer roots, SGI, formerly known as Silicon Graphics Inc., wants to recapture the heart of high-performance computing and is willing to make some noise doing it.

Robert Bishop, who took over as chairman and chief executive for the Mountain View, Calif.-based company in August 1999, has been keeping SGI's profile low for the past year, but now feels that the right pieces are in place to start bragging again about what the company can do.

"It has been a year of transformation," he said. "Now we want the spotlight."

The bulk of that transformation has been in divestitures and spin-offs of businesses that did not fit the visualization and supercomputer prowess that have been SGI's bread and butter. Among those moves were the divestiture of its Cray vector business in April and the spin-off of MIPS Technologies Inc. in May.

Bishop's goal was to stabilize the company, which analysts and others had criticized for straying from its supercomputer roots into areas like selling Windows NT servers. Now he wants to re-establish the company as a premier provider of supercomputer technologies, Bishop said.

"We took a lot of hits in 2000, and I've got the scars to prove it," he said.

The company's financials for its fiscal 2000, which ended June 30, were awash in red ink. On $2.3 billion in revenue, the company reported a loss of $830 million, compared to net income of $54 million and overall revenue of $2.7 billion in fiscal 1999.

But most of the loss is attributable to one-time charges the company took as it divested its noncore businesses, said Richard Chu, an analyst with the investment banking firm SG Cowen Securities of Boston.

"I think they are on the cusp of some very good news," he said.

Bishop said he expects the company to double revenue over the next three years.

As part of its renewed commitment to supercomputing, the company has launched new releases of its Origin and Onyx systems, which feature modules and an architecture that allow for a very flexible system that can grow and change as time goes by, company officials said.

"They are definitely getting all their ducks in a row. Now it is a matter of executing those ducks," said Joyce Becknell, a director at the market research firm The Aberdeen Group of Boston.

The company is now clearly focused on the core business that differentiates it from competitors like IBM Corp., Compaq Computer Corp. and Sun Microsystems Inc., said Carl Howe, an analyst with Forrester Research Inc. of Cambridge, Mass.

"They were a bit wrong-headed for a couple years," Howe said of SGI's attempts at providing Windows NT systems. "The story they are telling now is a lot more straightforward."

It is a story SGI plans on telling a lot in the government market, said Anthony Robbins, president of SGI Federal. Sales to the government accounted for 22 percent of SGI's 2000 revenue, he said.

Customers with the Defense Department and NASA have been early adopters of SGI's technology since the company was founded in 1982, Robbins said.

SGI is working with NASA Ames Research Center to develop a 1,024-process SGI Origin 3000 system that will be used for aeronautics and earth and life sciences. Also, the Army Research Lab will be using SGI's modular technology to keep the center at the forefront of high-performance computing.

"The bookings are high, but if we can't ship, we'll have problems," Bishop said.

Until SGI starts delivering on its orders and shows a consistent profit, Bishop said he knows Wall Street will not be kind to his company. SGI's stock has traded from a low of $1.98 to a high of $5.19 over the past 12 months. On Aug. 31, the company's stock closed at $4.688.

"Wall Street is going to wait until we deliver predictable profits for a few quarters in a row," he said.

Bishop said he expects the company to reach profitability this year. "We will walk away from projects if they are not profitable for us," he said.

A close working relationship with systems integrators will be vital for SGI's growth in the government markets, Bishop said. "The door to government business is through the systems integrators," he said.

Key government partners include Computer Sciences Corp., Raytheon Co. and Lockheed Martin Corp., Robbins said.

SGI, for example, is playing a major role on Lockheed Martin's Distributed Mission Training contract with the Air Force. Under that $249 million contract, Bethesda, Md.-based Lockheed Martin is building F-16 flight simulators that can fly against each other even if they are physically located in different parts of the country.

With the formation of a dedicated government unit in early April, the company is in position to give integrators and customers the type of service they want, Robbins said, noting that half of the 400 employees in the government unit provide support services.

"The integrators can get technology anywhere, but not many companies can deliver solutions to them," he said.

To be successful, SGI must show that it understands its customers and their problems, Aberdeen's Becknell said. "That is where your execution becomes the challenge," she said.

For Bishop, it is a challenge the company is ready to take on, and not in a quiet manner.

"I wanted to make sure we could do it before I shot my mouth off," he said. "We are right back in the heart of the market we love."

Mountain View, Calif.

Business: Maker of supercomputer and visualization products

Founded: 1982

Fiscal 2000 Revenue: $2.3 billion

2000 Loss: $830 million

Fiscal 1999 Revenue: $2.7 billion

1999 Earnings: $54 million

Ticker: SGI on the New York Stock Exchange

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