The board of directors for Silicon Graphics (SGI) will meet tomorrow and Wednesday to discuss the workstation maker's options for curbing costs following the company's posting of a loss today for its first fiscal quarter.
While SGI met revised expectations for the quarter, analysts say layoffs and restructuring are imminent as the company works to gain control of costs. They say either a restructuring or a merger are necessary for survival.
"Costs have to come down or else they are going to bleed, and labor is a big cost," said Brian Eisenbarth, an analyst with Collins & Company in San Francisco.
The company has been faced with production problems, image problems, limited markets for its 3D graphics workstations, tough competition, and pricing pressure.
And to make things worse, back orders for newer products have sent customers elsewhere because they got tired of waiting. "They have done some damage as far as the end user goes," Eisenbarth said.
And it will take a couple of quarters to recover.
"As customers go elsewhere you keep the same cost structure. That will get into a negative cash flow situation, and once it goes negative, they will need external financing," Eisenbarth said. "To avoid that, they need to start getting rid of people."
There has been speculation that the company plans to lay off 300 to 500 employees, but those figures equal less than 5 percent of SGI's 11,000-strong workforce.
Other options include beefing up the company's sales force in order to increase awareness that SGI makes servers, too. Most people associate SGI with graphics workstations rather than servers.
"SGI has an image as a graphics workstation company, and when it comes to IT departments adding servers, SGI doesn't come to mind," said Eisenbarth.
But SGI is still a market leader in the high-end 3D graphics space. Workstations produce high margins and high profitability, but the market is very limited (to Hollywood production studios), and it is facing competition from Hewlett Packard. And increased competition puts pressure on pricing.
And as analysts expect consolidation to continue propelling the big companies with a wide variety of offerings, businesses more and more want to deal with one company for all of their computing needs.
So SGI is trying to transition into becoming a broad-based company, and it isn't something the company can do overnight. These circumstances, along with a sinking stock price, make SGI an attractive merger candidate.
"It would be a great part of another company that doesn't have high-end workstations," Eisenbarth said. "With the stock down so much, the best thing for shareholders would be [for SGI] to merge with IBM, Hewlett Packard or Sun Microsystems (SUNW).
"The company will not be making any comment on a near-term action plan until later this week, after our plans have been fully reviewed with the board of directors," said SGI spokesman John Thompson. "Until that time, we won't be making anyone available for comment."
For the quarter ending September 30, including special charges, the company's net loss was $56 million, or 31 cents per share, compared with a net loss of $22 million, or 13 cents per share, in the first quarter of fiscal 1997.
Excluding a $17 million charge related to the company's acquisition of ParaGraph International and other merger-related expenses of $2 million, the company's net loss was $37 million, or 20 cents per share, which is consistent with its preliminary release earlier this month.
Analysts' revised estimates pegged a loss of 20 cents a share, according to First Call. Before the company issued a preliminary warning about its loss, analysts had expected the company to report earnings of 7 cents per share for the quarter.
Silicon Graphics' revenue for the first quarter of fiscal 1998 was $768 million, compared with $766 million for the same quarter a year ago.
The company attributed the disappointing results to a shortfall in its server business, particularly in the United States. SGI said it is taking steps to strengthen sales and marketing efforts for its family of server products.
Silicon Graphics has endured a turbulent year. Following a couple of weak quarters, the company's stock surged after many analysts upgraded it to a "buy" rating from "hold" when the company reported net profits of $102.4 million, or 56 cents a share, for the period ending June 30.
At that time, both Silicon Graphics and analysts who follow the company were optimistic that the company had completely turned itself around.