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Loss stalls SGI comeback

The company's hopes for a quick turnaround are dashed by its announcement of a third-quarter loss that exceeds expectations.

Silicon Graphics' (SGI) hopes for a quick turnaround were dashed by today's announcement of a third-quarter loss that exceeded expectations.

It will mark the third straight quarter of red ink at SGI, a company praised for its know-how in helping to create special effects for movies such as Jurassic Park. The problems cited in SGI's third-quarter warning--declining sales of its core business, Unix workstations, and stalled marketing efforts on the server side--mirror those of past quarters.

"The June quarter probably will be a loss [as well], and we may see some improvement on the cost side in the September quarter," said Brett Rekas, an analyst with BancAmerica Robertson Stephens. "But it will probably be December before we see any improvements in stabilizing the business, getting the cost structure down, or growing revenue."

SGI has hired Rick Belluzzo, a well-regarded industry executive from Hewlett-Packard, as chief executive to turn the company around. Next month, Belluzzo plans to give Wall Street a closer look at its recovery plans.

One industry source said the new SGI plan will result in a partial divestiture of its MIPS chip architecture. SGI uses chips based on this architecture in its own computers and licenses it out to others.

SGI is expected to spin off the MIPS architecture for embedded devices, such as TV set-top boxes and handheld phones, according to a source who requested anonymity, while the MIPS architecture it uses for its own workstations and servers will remain in-house.

But analysts who listened to the company's conference call this morning regarding the earnings surprise said they still were skeptical that Belluzzo's plan will be that effective, at least in the short term.

SGI will take a radical step later this year by entering the Microsoft-Intel workstation market. But this may happen later than originally expected, according to analysts.

The company's proprietary Unix workstation line is coming under increasing pressure from hard-charging Wintel vendors such as Compaq Computer, HP, and Dell Computer, which often price their products well below SGI's offerings.

When SGI announced it would roll out the NT workstations during the second half of this year, Wall Street was thinking it would be in the summertime, said Ken McBride, an analyst with Salomon Smith Barney. Now it appears the workstations will likely ship closer to the year's end, he added.

But one industry source said the workstations still are expected to come out during the late summer.

SGI's stock, which jumped 22 percent to 13-3/4 on Belluzzo's appointment, largely has stagnated since the CEO came aboard. Rekas said the stock likely will remain within a small trading range until year's end.

SGI's stock held up well on today's news. The company's shares fell just 3/16 to close at 13-15/16.

Despite the setback, SGI says it's confident about the company's prospects. "While we are disappointed in the quarter we are having, we remain focused on the longer-term priorities of the company," said John Thompson, an SGI spokesman.