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Poor earnings sink SGI stock

Shares of Silicon Graphics tumble as much as 25 percent after it posts profits that miss analysts' expectations.

Silicon Graphics' (SGI) stock tumbled as much as 25 percent today after posting profits that missed analysts' expectations because of a strong U.S. dollar, weakness in parts of Europe and Asia, and a transition to desktop products.

In active trading, the stock dropped to 12-7/8 from yesterday's close of 17. SGI reported earnings after the markets closed Thursday.

After two quarters of red ink, the company reported net earnings of $11 million, or 6 per share, compared with net income of $53 million or 31 per share in the third quarter of fiscal 1996. Excluding charges relating to the merger with Cray Research, SGI would have reported earnings of 9 cents a share.

But Wall Street expected the company to report a much larger rebound due to strong demand for the Octane workstation.

Analysts anticipated a profit of 27 cents a share for its third quarter, which ended March 31, compared with a profit of 31 cents a share last year. In the previous quarter, the workstation maker posted a loss of 7 cents a share, according to First Call.

Brian Eisenbarth, an analyst with San Francisco-based Collins & Company, said: "Last quarter, their backlog was increasing substantially...They had close to a billion dollars in backlog, and they are still getting strong orders across the board. If they can get units going out the door, this could be mitigated. The bleeding has stopped here."

The company reported revenue of $909 million for the quarter, compared with $677 million for the same quarter a year earlier. SGI said revenue growth was adversely affected by a strong U.S. dollar and weakness in parts of Europe and Asia, as well as the desktop product transition.

The company's new Octane workstation began shipping on March 21, later in the quarter than planned, but strong sales of other workstations were expected to be the driving force of increased revenues for this quarter.

"Indigo2 sales improved, O2 hit 20,000 units shipped by the end of February, and server demand is strong. Order growth and backlog will be important indicators entering FQ4," said a Morgan Stanley report.

Salomon Brothers also expects SGI to show continued success of its O2 workstation. "It has had a screaming start since it was introduced [in October]. SGI shipped 10,000 units in the quarter and maintains shipment at these levels or higher going forward. We believe that the O2 workstation has forced Hewlett-Packard (HWP) and Sun Microsystems (SUNW) to take price actions to match the O2's price/performance," a Salomon report said.

Despite analysts' big expectations, the company's stock has been on the slide, dragging down its 52-week low, which was previously 18-1/8 last November.

SGI's fundamentals are strong, but buyers have been waiting to see the final results, added Eisenbarth.

Last quarter, SGI attributed its revenue and earnings shortfall to product slippages, but robust sales and expansion into new markets will fuel future growth as well.

The Salomon report continued to say that SGI is extending its reach into commercial accounts using its Web servers and decision-support systems. That is fueling the Origin 200/2000 product line to experience much higher growth than the 25 percent industry average for server growth being projected by IDC Research.

Last quarter, the workstation maker reported a net loss of $13 million on revenue of $825.3 million for the quarter ending in December. Losses were attributed to a delay in shipping its entry-level O2 workstations and Origin family of servers, along with $14 million in merger charges from its June acquisition of Cray Research. Without the charge, the company would have posted a profit of 1 cent a share.

"Octane [which began shipping on March 21] is the last major product refreshment in the company's product line. Demand is expected to outpace supply, and therefore we expect the company's backlog to be up again this quarter," a Salomon report had stated.