SGI aims high with Altix machine

The National Aeronautics and Space Administration has long been a customer of SGI's high-end computers using its Irix operating system and MIPS processors. Now it's following suit with the company's Linux-Itanium line, called Altix. The new product line is a key part of the company's attempt to try to reverse a years-long revenue decline by tapping into growing markets.

"NASA Ames (Research Center) has stepped up to the plate by installing a 256-processor single-system image Altix machine," SGI Chief Executive Bob Bishop said Monday in a conference call with financial analysts. "They are in fact intending to scale this machine to a 512-processor single-system image in the very near future."

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Running a single-system image means that a single instance of the operating system spans the entire machine. In contrast, much recent work using Linux in technical computing markets has involved numerous independent but interconnected servers.

The SGI and NASA work is a significant expansion of the use of Linux, which historically has run only on lower-end servers with a handful of processors. However, the SGI machines are geared for technical computing tasks, not the mainstream commercial workloads such as housing corporate databases for which IBM, Hewlett-Packard and Sun Microsystems design their high-end servers.

SGI's future depends on Altix, said Charles Wolf and Justin Udelhofen, analysts for Needham and Co., in an October report. "The company's only hope for revenue expansion--aside from a modest upgrade cycle to its current installed base--is its Altix line of Linux supercomputers. Accelerated uptake in this new hybrid platform would enable SGI to wean itself from its significant investments in proprietary operating system and processor technologies," the analysts wrote.

SGI also sold Altix systems with at least 128 processors to the U.S. Naval Research Laboratory, Oak Ridge National Laboratory and Pacific Northwest National Laboratory, Bishop said. SGI said in August it plans to make the 128-processor Altix models a standard configuration in the spring of 2004.

Linux is growing in popularity but has been caught up in legal action by SCO Group, which asserts that Linux infringes on its own Unix intellectual property. Though SCO last week said it is satisfied with current discussions with SGI, the two companies have tussled over SGI's right to use Irix, a version of Unix.

SGI Chief Operating Officer Warren Pratt said Monday on the conference call that the company is confident Linux is safe. After reviewing the software involved, "We believe that SCO's allegation have no merit. We don't believe SCO has any basis for terminating our fully paid Unix license," Pratt said.

"We do not think the current controversy will stand in the way of the long-term trends affecting the adoption of Linux," he added. "It's full speed ahead with our Linux and Irix products."

The company's Irix-based line, called Origin, remains more advanced than the Altix products for now. In the most recent quarter, SGI installed a 2,048 single-system image machine at the Wright-Patterson Air Force Base in Ohio, Bishop said.

But times have been tough for Mountain View, Calif.-based SGI. After a failed attempt to become a mainstream server seller, the company has been working in recent years to return to high-end technical computing and visualization systems despite the increasing competition from larger companies.

SGI cut 600 employees in August and 400 in May. The company's employment will drop to about 3,100 in December, Chief Financial Officer Jeff Zellmer said Monday.

In the most recent quarter, SGI had a net loss of $43.6 million compared with $34.5 million a year ago. However, the recent quarter's loss included non-recurring costs, including $15 million in severance charges and $9 million to move corporate headquarters to a less expensive location.

Some bright news came earlier in October, when SGI announced higher revenue than previously forecast for its first fiscal quarter of 2004, which ended Sept. 26. The company reported $218 million in revenue, less than the $240 million for the same period a year ago, but more than the $200 million to $210 million it earlier had forecast.

The Needham analysts overall were unfazed by the SGI revenue increase. "Its outlook remains largely unchanged. Namely, the continual erosion of its Origin sales and installed base has yet to subside. And competitors continue to swarm at the company from all sides," they said.

Profitability has edged closer, though. With the job cuts and other measures, the company said its financial breakeven point will arrive with quarterly revenue of $235 million and $240 million, which it achieved in three of its quarters in the last fiscal year. Previously, the breakeven point was $280 million to $290 million, Zellmer said.

In the quarter now under way, SGI said it expects revenue of $220 million to $240 million, Zellmer said.

Government customers always have been significant at SGI. In the most recent quarter, Bishop said SGI "received from the U.S. government a major order of great importance to homeland security," an order that includes Altix, storage and advanced visualization hardware. In addition, the company sold its largest visualization system ever to Los Alamos National Laboratory for nuclear weapons maintenance.

Next on SGI's agenda is dealing with a $231 million convertible bond due in September. SGI failed in an earlier attempt to restructure the debt, but it is in negotiations with bondholders and expects to try a new restructuring effort this quarter, Zellmer said.