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SGI sinks as CEO departs

Rick Belluzzo's decision to quit as the head of Silicon Graphics Inc. (NYSE: SGI) caught his own board off guard -- not to mention shareholders -- and sent shares plummeting 14 percent Tuesday morning.

Shares recovered slightly, down 1 5/8 to 10 13/16, or 13 percent by mid-morning. Banc Boston Robertson Stephens downgraded the stock from "buy" to "long term attractive" Tuesday.

SGI on Monday announced the resignation of Belluzzo, who had been chairman and CEO since joining the company in January 1998. Board member and former sales executive Robert Bishop was named as Belluzzo's replacement, effective immediately.

Belluzzo was brought in a year and a half ago to reverse SGI's decline in the face of increased competition from rivals such as Sun Microsystems, and a general decrease in demand as cheaper hardware usurps functions once the sole domain of high-end workstations. Despite cost cuts, SGI lost money five out of the six quarters Belluzzo ran the company.

"Bishop is an incredibly capable guy," said Richard Chu, an analyst at SG Cowen Securities Inc who continues to rate SGI "neutral."

"Risks that have been there all along with the company's restructuring still exist," Chu said, but it's not as bleak as the market is making it look, he added.

Earlier this month, SGI announced its second major restructuring in less than a year. Although the maker of graphics workstations, servers and supercomputers recently reported better-than-expected fourth quarter results, analysts have continued to question the company's long-term prospects.

SGI said Belluzzo resigned on his own. At a Monday conference call with reporters, company executives declined to give reasons for Belluzzo's decision. "This was a surprise to the company," said Bill Kelly, SGI senior vice-president and board secretary. "It was certainly not anticipated ... This was entirely driven by Rick."

Belluzzo took a non-CEO job with a company that does not compete with SGI, Kelly said. According to "people familiar with the matter" cited in Tuesday's Wall Street Journal, Belluzzo will join Microsoft's highest circle of executives, to take charge of its interactive operations that include the Microsoft Network service.

The turn of events began in the last several days, he said. SGI's board offered Bishop the CEO position within the last two days, executives said. "We felt that with the amount of change and work we have in front of us ... the company could not afford an extended period of interim leadership, and we happened to have an extremely capable person on our board already," Kelly said.

Although sales were better-than-expected in the last quarter, SGI saw problems last year when it first introduced Windows NT workstations. Belluzzo also was unable to turn the acquisition of Cray Research into a winner. Current plans call for SGI to quit the NT business and sell the Cray unit, which makes supercomputers.

Bishop, who the company credited with building its global sales force from scratch, said he agrees with the latest strategies initiated by Belluzzo. "The execution details are all being worked out as speak, and that's where we have some room for involvement or fine-tuning," Bishop said.

SGI's timetable for restructuring and returning to profitability remain unchanged, Kelly said. SGI has said it expects to make a profit in the current quarter.

Executives on Monday did not blame Belluzzo for SGI's troubles over the last few years. Until recent emergence of standards for the Internet, graphics chipsets, 64-bit processors and open source operating systems, SGI had to rely entirely on itself to offset the workstation market's decline, Bishop said.

"We're actually returning to our starting point," he said. "We did not have the choice (five years ago) of leveraging ourselves with the Internet, or leveraging ourselves with Linux, or leveraging ourselves with Merced, or leveraging ourselves with nVidia."

SGI's stock price has traded in the low teens for most of Belluzzo's tenure. Shares closed Monday's regular trading at 12 7/16, up 5/16 for the session. Fourteen of 16 analysts polled by Zack's Investment Research maintain the equivalent of a "hold" rating on the stock.

Tiffany Kary contributed to this report.