SGI posts a surprise profit

The company vaults over dire expectations to post positive quarterly earnings.

Stephen Shankland principal writer
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Stephen Shankland
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SGI vaulted over dire expectations of a loss-making quarter, posting a profit of 12 cents per share that far outstripped analyst predictions of a 5-cent loss.

Cost-cutting and sales of Unix servers and workstations were largely responsible for the improved results, chief executive Rick Belluzzo said in an interview with CNET News.com.

"It came together this quarter," Belluzzo said. SGI cut its fiscal-year expenses by $240 million, $40 million more than the company promised Wall Street when it announced its restructuring plans last year, he said. Cutting 1,000 jobs and cutting down from four manufacturing sites to two contributed to that cost cutting, he said.

The good results are a boon to SGI's drawn-out struggle to bring the company back to profitability, a job Belluzzo undertook when he was named CEO in January 1998.

"Things look great," said financial analyst Dan Niles of BancBoston Robertson Stephens. He expected a loss of 3 cents a share though he thought they had a shot at profitability this quarter. "They blew those expectations away. I'm very pleased with the bottom line," he said.

Despite SGI's Unix success, the company hasn't yet profited from its strategic shift to mainstream Intel chips. The company is using novel tactics such as adopting the Linux operating system more aggressively than most and coming up with its own high-speed graphics system for its Intel workstations, but the market hasn't responded.

The strategy makes SGI different from the traditional sellers of Intel-based products such as IBM, Compaq, Dell, and Hewlett-Packard, whose systems tend to be harder to tell apart.

In the same quarter a year ago, SGI posted a net loss of 31 cents a share--not including $205 million in restructuring charges that quarter as the company embarked on its effort to move its products to growing markets.

Today's announcement closed the company's fiscal year with a net loss of $115 million, or 62 cents per share.

This quarter's net profit was $22 million. The figure excludes a one-time gain from money raised by selling shares of MIPS, the chip designer that SGI has spun off. Including the MIPS gain, the net income was $158 million, or 81 cents per share.

SGI had hoped that the two most recent quarters would be profitable overall, but that goal was all but abandoned when the company experienced difficulties in producing its new Intel workstations and rolling out a new CPU for servers.

"They're a 'second-tier' server company," said International Data Corporation analyst Jim Williamson.

"Their current attempts to come up with a volume-oriented mass-market strategy doesn't seem to fit their organization and their business model very well. In the mainstream market, they're really not players. It's difficult to imagine that building a technology roadmap around Intel is going to help them change that."

The move to higher-volume markets was initiated with the arrival of chief executive Rick Belluzzo from HP in 1998.

In the first three months of 1999, SGI had server revenue of $198 million, a 26 percent drop from the $267 million figure from a year before, according to IDC. That pales compared to Sun Microsystems, a company with a similar product line, whose revenues increased 33 percent from $1.24 billion to $1.65 billion in the same period.

In terms of worldwide server revenue, SGI is ranked 11th--nowhere near giants such as IBM, Compaq, HP, and Sun, but still ahead of Amdahl, Sequent, and Data General.

That revenue doesn't include workstation sales, an area where SGI has traditional strength. The company's computers were used to animate the dinosaurs in Jurassic Park and, more recently, the cut-out characters of the movie South Park: Bigger, Longer, and Uncut.

Despite the manufacturing difficulties, the Intel-based workstations have been praised for their technology. SGI has said the workstations will support Linux by the end of the year.

SGI debuted its Intel workstations in January and will debut its first Intel servers in early August, a company spokesperson said. The Intel servers will debut with both Microsoft Windows NT and Linux operating systems.

SGI invested in Linux computer maker VA Linux Systems in June, a likely indication of where SGI hopes to get some manufacturing help.

SGI has had excellent technology that appeals to technical markets such as research labs, but the company hasn't been very successful in bringing its products to the attention of managers, accountants, and executives who dominate outside that technical area, said IDC analyst Dan Kusnetzky.

Often, "it's the businesspeople, not the technologists, who are making the decision," Kusnetzky said. "Microsoft and Sun have been speaking to the businesspeople for quite some time. SGI is speaking to technical people."