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SGI earnings propel stock

The workstation maker sees its stock jump 9.4 percent after reporting improved fourth-quarter results that blasted past analysts' estimates.

Silicon Graphics (SGI) saw its stock jump 9.4 percent after reporting improved fourth-quarter results that blasted past analysts' estimates.

The company's stock soared as much as 27 percent in early morning trading before closing at 27-7/16, up 2-3/16 over yesterday. Volume reached as high as 15.9 million shares, ten times the average three-month trading volume of 1.5 million shares.

The workstation maker grabbed the attention of analysts and enjoyed a round of upgrades following the earnings announcement.

Salomon Brothers, Josephthal Lyon & Ross, Amro Chicago, and Hambrecht & Quist upped their ratings on the workstation maker to "buy" from "hold." Goldman Sachs upped to "buy" from "market perform," while Alex. Brown raised its rating to "buy" from "market perform," Cowen & Company upped its rating to "buy" from "neutral." Bear Stearns upped SGI to "attractive" from "neutral."

The workstation company posted net profits of 102.4 million, or 56 cents a share, for the period ending June 30, compared with a loss of $48.7 million, or 30 cents, a year ago.

Wall Street had expected the company to post earnings of 34 cents a share, according to First Call.

Revenues for the quarter reached $1.2 billion, up 19 percent from $977.4 million a year ago.

Edward McCracken, chairman and chief executive, said the company was able to better its performance by completing its product transition cycle and improving its manufacturing and forecasting process.

"We improved the flow of products to the market and are shipping them smoothly," he said.

Analysts said SGI appears to have rebounded faster than expected.

"They had hit some gaps in their product line and had to fold Cray [Research] into their operations after the merger," said Brian Eisenbarth, an analyst with Collins & Company in San Francisco. "But it looks like they're on track and if their order growth continues at its current level, it cold be the start of a turnaround."

Last quarter, SGI had some large orders stacking up as manufacturing delays occurred, he said. That raised concern on Wall Street that the company could face some customer fallout. Eisenbarth, however, said those fears now appear to have been put to rest.

"They're booking revenues at a fast rate and their profit margins have rebounded," he said.

The company's servers business grew 30 percent in the quarter over the previous year. Servers comprise 52 percent of the company's business.

Meanwhile, its graphics business declined by roughly 10 percent from year-over-year figures, McCracken said. Graphics, which comprise 48 percent of the company's revenues, fell because of the product line transition as well as competition from Windows NT to the Unix market that SGI serves.

This performance comes with the company in the midst of revamping its operations in the quarter. Last May, SGI announced it would reorganize its business and executive team.

Although SGI performed well in the quarter, it fell short of analysts' expectations for the year and its profits declined. SGI reported annual net profits of $78.5 million, or 43 cents a share, down from its year-ago figure of $115 million, or 65 cents.

SGI's big investment areas for fiscal 1998 will be in the telecom space and in the Web-related arena. The company plans to increase its investments in telecommunication servers by 50 percent next year, while also adding a special sales force to sell to telcos and media companies.

The company expects to complete its acquisition of tiny 3D Internet software developer ParaGraph International in the first quarter, with a write-off of roughly $20 million.