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2HRS2GO: SGI takes the economy on the chin

    COMMENTARY--Everyone feels the pain of the bellwethers hit by the economic slowdown, but it's a lot harsher for the ones who were on the verge of getting back into the game.

    Once considered a premier holding for many technology portfolios, SGI (NYSE: SGI) made its reputation with uber-workstations for fancy graphics and design. A series of strategic missteps--the purchase of Cray Systems will go down as one of the legendary screw-ups in the history of the tech industry--combined with strong competition from Sun Microsystems (Nasdaq: SUNW) to drive SGI into the depths of near-irrelevance. Even as the overall market for tech stocks surged in the late ྖs, SGI languished in a long decline. SGI may have hit the bottom last year, but it hasn't gotten up yet. Shares have been trading in the $3 to $5 range for the past 10 months.

    Bob Bishop, brought in as CEO after Rick Belluzzo jumped to Microsoft (Nasdaq: MSFT) in 1999, has had the thankless task of turning around a company hobbled by a narrow market that isn't growing too rapidly. He hasn't been hugely successful so far.

    After nearing profitability five quarters ago, SGI hit another of its infamous product delays and watched its bottom line fall back into the red, just in time to catch the slowdown in technology spending.

    You can't blame Bishop for everything. SGI simply didn't have the cachet to muscle past the widely reported parts shortage of last year. And Bishop can't be held responsible for the downturn in technology spending.

    Heck, SGI even took a hit from the presidential election. The U.S. government, a major consumer of high-end computing, put off several defense and intelligence projects pending a review by the new administration.

    Just as it seemed as though SGI's previous plant closures and purges of the work force were about to kick the company back to profitability, the bottom dropped out of the tech market. Like everyone else, SGI has seen its orders delayed and delayed and delayed, and now it's slashing another chunk of employees.

    SGI couldn't do much about larger economic and industry trends. But the fact remains that although the company has boosted revenue sequentially each of the last three quarters, its growth has been unimpressive throughout Bishop's tenure.

    "Despite the company's strong balance sheet and product line, we remain cautious on whether management can deliver the right operating strategy to carry the company ahead," writes Lehman Brothers analyst George Elling, in a research note released today after SGI reported its latest quarterly results.

    During this morning's conference call with analysts, SGI executives stuck to their theme of recent quarters: cost cuts and a shift away from pure box sales.

    SGI isn't trying to compete in the standard workstation market anymore. Sun, Hewlett-Packard (NYSE: HWP) and others haven't just eaten SGI's lunch in that field; they've taken over the whole cafeteria.

    So SGI is moving on. Although the company still gets 75 percent of its revenue from traditional sales of hardware, SGI very much wants to adopt that philosophy made a corporate clich? by IBM (NYSE: IBM): Solutions.

    SGI doesn't want to be thought of as a just another company selling fast workstations for graphics. No sir, they're selling Systems for Collaborative Visualization.

    It's actually nifty technology, about as close to Golly Gee! science fiction visions as you can get: wraparound screens and projections with big, powerful computers networked to let a bunch of engineers work on a design together. Oil companies use SGI's "reality centers" to create models and find new places to drill. Car makers can simulate crashes with them.

    Technologically impressive, and an area that no one else concentrates on. "At the very pinnacle of the business, we're alone," Bishop said, during a telephone interview this morning.

    Unfortunately, they also don't have many customers at the moment. "At the very pinnacle, of course, it's a question of volume," Bishop admitted.

    SGI has installed 450 reality centers around the world so far. Large corporations such as BP Amoco and Shell each have more than 10, Bishop said.

    The company currently gets about a quarter of its revenue from these highest-of-high-end systems, if you include the services work that each system requires. SGI wants that figure to rise above 50 percent within three years.

    "We are becoming famous, more famous in this high-end area of integrating complex, collaborative visualization involving professional services, high-performance computing, high-performance storage that goes into it as well, and the networking to connect these systems around the world," Bishop said.

    Which is great, but you still have to wonder how big that market really is. After all, there's a reason why SGI is alone in the space. International Data Corp. estimates just single digit growth for high-end computing over the next few years.

    Right now, the best you can expect from SGI is survival. The company's only immediate goal is reaching break-even.

    "We're not trying to create guidance at this point time," Bishop said. "We think it's just too uncertain out there to do that. The clear goal is to be in safe harbor in these difficult times."

    Six months ago, I said that there was hope for SGI, and there still is. This business isn't going to dry up overnight. It's not about to die.

    But despite the economy, it can't be just about survival anymore. That was the issue last year.

    SGI also promised and failed to reach break-even before, when technology spending was still robust. Now that the economy is weak, it's harder to have a lot of confidence in anyone's growth, let alone SGI's. And when the economy returns, it's hard to say for sure that SGI will come along. It's been left behind before.

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