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SGI's NT workstation rollout slips

News of a key to SGI's plan to regain profitability and market share comes amid an earnings report showing more losses.

Silicon Graphics will delay shipments of its workstations based around Intel processors and Windows NT until January 1999, an embarrassing slip that once again pushes back the company's revival strategy.

News of the delay came with Silicon Graphics' yesterday's announcement of its first-quarter earnings. The Mountain View, California, company reported net losses of $44 million, or 24 cents per diluted share, compared to a net loss of $56 million, or 31 cents per diluted share, for this quarter last year.

SGI's net losses were lessened by the initial public offering of processor company MIPS, in which SGI owns an 85 percent stake. Without the gain from MIPS, Silicon Graphics would have had a loss of 41 cents per diluted share.

The loss was better than analysts' expectations of 45 cents a diluted share, according to First Call. With the delay, SGI will not any reap revenues from the new machines until its third fiscal quarter 1999.

The ship date for the Intel/Windows NT workstations was pushed back because SGI "discovered a small problem during testing," and SGI is willing to take "no shortcuts on quality," SGI chief financial officer Steve Gomo said in an interview.

Gomo didn't specify the nature of the problem, but he said its source has been tracked down. The machines were originally expected to ship in the second half of 1998 and earlier this year expected toward the September-October time frame, said sources.

The slip to January is a disappointment, said Philip Rueppel, an analyst with BT Alex Brown. "But it's one where I'd rather see a high-quality product without bugs in January than one that is riddled with issues coming out in December," Rueppel said.

"At this point it's not a major slip," Rueppel said, but further delays would be bad. "It's critical for them to be competitive in the NT space. At this point, HP and Sun are taking market share, because they both have a refreshed product line."

The new SGI computers are based on Intel's Xeon chips. Earlier this year, SGI said it would begin to phase out workstations based on MIPS chips and its IRIX Unix OS in favor of those based around Intel and Microsoft technology. SGI will also shift its servers to the Intel platform.

The Intel/Microsoft strategy forms a key part of Silicon Graphics' plans for "transitioning our business to growth markets," said SGI chairman and chief executive officer Rick Belluzzo, who took over SGI in January after leaving his post running Hewlett-Packard's computer organization. Belluzzo came to SGI to guide the transition to the more cost-effective technology platforms.

Delaying the ship date to make sure the workstations work well shows that Belluzzo is "firmly in charge," Rueppel said. "That's a hallmark of Hewlett-Packard. They rarely introduced products before they were ready."

Although the first-quarter results mean four consecutive quarters in the red for SGI, Gomo pointed out that all is not dim. SGI narrowed its losses this quarter and will try to achieve a profitable fiscal year, which ends June 30.

The good news, in Gomo's opinion, is that SGI has made progress stabilizing revenue in the low $600 million range, reducing operating expenses, and building server sales.

SGI's first-quarter results were mixed, Rueppel said. "They're still in the middle of a transition year. There's a lot of work that still has to be done to get the company back into a high-growth mode," he said.

This fiscal year, SGI's NT workstations will be a new product and probably will account for less than 10 percent of SGI's revenue. The machines won't even come out until the third fiscal quarter for 1999. But in fiscal year 2000, SGI expects the workstations to account for a quarter or more of SGI's revenue.

In the workstation market, SGI hopes to capitalize on its reputation for fast graphics, Gomo said.

Rueppel agreed. "When [SGI's] NT product comes out, it'll be very competitive. It'll likely have superior graphics performance," he said.

However, Gomo said the NT workstations aren't the only part of SGI's future. The company also is trying to latch onto the growing server market, he said, even while acknowledging problems in the server business.

"We're nowhere near where we really want to be, or where we should be," he said. "We've not done a good job marketing ourselves and providing all the pieces that are necessary to sell the servers. People don't just want hot boxes, but solutions to problems."

As a result of these weaknesses, SGI will continue its effort to add services such as re-engineering help, sales financing, and development of "middleware" pplications that let employees use programs running on servers.

Gomo said SGI's server sales for the first quarter increased more than 20 percent compared to the same quarter a year ago.

"We couldn't be more pleased" with the MIPS IPO, Gomo said, noting that MIPS stock began trading at $14 a share but today is worth more than $23 a share.