SGI Bids Adieu to NT in Latest Restructuring (News) August 10, 1999

SGI Bids Adieu to NT in Latest Restructuring

By Brian Graney (TMF Panic)
August 10, 1999

When visual workstations and technical servers maker Silicon Graphics (NYSE: SGI) sent investors hearts a-flutter earlier this year with its decision to embrace Wintel technology and enter into the crowded Windows NT space, a fellow Fool wondered whether the company's proprietary enhancements to NT would provide the competitive advantage needed to restore SGI to its former place as a darling of the U.S. computer industry. Today, SGI answered that question with a resounding "No."

In a flurry of press releases this morning, SGI said it is shaking up its business yet again in an effort to find its proper place in the computing environment of the future. And apparently, Windows NT does not fit into the picture anymore. The company said it has reached a "preliminary understanding" with an unnamed company to share the development and distribution load for its Visual Workstation NT-based machines, which are all of seven months old.

Far from being the growth firecracker that some investors had expected, SGI's first Wintel offerings turned out to be a dud. Fiscal Q4 sales of the NT workstations came in at $50 million, or at the absolute low end of the $50 million to $100 million range that had been forecasted. That was up from $35 million in the prior quarter, but not enough to secure the low-end market's place as a primary future revenue driver for the business.

The company's Cray supercomputing unit, which represented less than 10% of total revenues in the most recent quarter, will meet a similar fate through the formation of an operating partnership with an outside company or some "other transaction." In connection with the reorganization of the two business units and others, some 1,000 to 1,500 jobs will be eliminated and an undetermined number of employees will depart to staff the new joint ventures and alliances in the works.

The remaining 8,000 or so SGI employees will concentrate their efforts on broadband Internet computing opportunities and mid-range servers running the Linux operating system. By narrowing its focus, SGI's 18-month-old management team finally seems to have settled on a business model that it likes. At the same time, however, the narrower focus on mid-level servers and workstations places SGI dead in the sights of larger players such as Sun (Nasdaq: SUNW) and Hewlett-Packard (NYSE: HWP).

So, it seems the firm is back to square one in terms of its business plan. Meanwhile, today's share price drop has left investors no better off than they were two years ago amid an earlier restructuring, which included the first round of layoffs in SGI's history.

The lesson to be learned from SGI's recent past is this: Great companies generate higher earnings and create shareholder value by cultivating and protecting competitive business advantages. Investors may be looking forward to an encore presentation of SGI's Q4 earnings surprise in the current quarter, but any sustained earnings growth hinges solely on SGI's ability to create some kind of an advantage for itself in its new, narrower business lines.

Related links:

Fool Plate Special, "Silicon Graphics Looking Less RISC-y," 01/21/99

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