THE DAY AHEAD: Can Linux boost growth-impaired SGI?

Larry Dignan
3 min read

SGI (NYSE: SGI), the company also known as Silicon Graphics, said its fiscal second quarter results set a platform for future growth. The platform is there, but the growth is missing. And to keep investors interested until it puts up better numbers, SGI is hoping to hitch its stock to the Linux bandwagon.

As expected, SGI posted a loss of a penny a share, in line with last week's preannouncement. Revenue, however, was down 5 percent to $648 million.

Can Linux revive SGI?

On a conference call Monday, analysts sounded unconvinced as CEO Bob Bishop argued that the company will be able to compete in a world full of Hewlett-Packard (NYSE: HWP) and Sun Microsystems (Nasdaq: SUNW). Bishop is focusing SGI on its core customers -- engineering, government and scientific markets -- and sees sales momentum ahead.

The numbers, however, don't lie. SGI said fiscal 2000 third quarter sales will be about $600 million with a small loss. In the fourth quarter, SGI said sales will be about $700 million with a small profit. Fiscal 2001, will show some growth, said Bishop.

SGI has been shaky for the last year or so. Aside from sales disappointments, Rick Belluzzo, who was supposed to turn the company around, left from Microsoft Corp. (Nasdaq: MSFT).

So why track SGI shares when there's no growth?

That's where Linux -- the alternative open source operating system that's giving Microsoft fits -- comes in. Bishop said the company will migrate its workstations to offer Linux. Bishop hopes a Linux-operated "cluster" computer built with 16 next-generation Intel Corp. (Nasdaq: INTC) chips will boost SGI's prospects. SGI also plans to offer Linux on the desktop and to its core customers.

Sounds like a good plan, but Bishop was a bit too honest about the future of SGI's Linux sales. (Note: We commend SGI for being upfront about its immediate Linux prospects. Many companies are using Linux to inflate stock prices without having actual products or sales traction.)

"At the moment, Linux revenue is fundamentally trivial," said Bishop. "All of this takes time so down expect major upside in the short term. It'll take 12 months before we see Linux as material."

A year from now, Bishop said Linux could account for 10 percent of sales.

Bishop's Linux outlook was refreshing. But it also means SGI won't move because of Bishop's candor. Linux isn't likely to dress up SGI shares, but that doesn't mean the operating system won't be a big part of SGI's future. The company recently announced it is working on bringing Linux to its high-end graphics customers. SGI also owns a nice chunk of VA Linux (Nasdaq: LNUX), which was worth $268 million as of Dec. 31.

Compared to some of the other Linux wannabes out there, SGI looks OK. SGI also has a media-streaming spin-off in the works and other key assets.

But it all comes back to SGI's lack of growth for now. The key thing to take away from this quarter is that SGI is stable. Now SGI has to get investors excited.

"Our plan is to have a steady stream of new products, solutions and services aimed at the hotspots of this market, including media streaming, digital asset management and high volume Internet traffic," said Bishop.

Analysts didn't hear a lot of specifics about the new products, though. So don't expect the 15 analysts that rate SGI a "hold" to change their stripes yet.

Tuesday's honor roll

Texas Instruments (NYSE: TXN) for having the smarts to chase the digital signal processor market and benefit from the wireless boom. TI put up another solid quarter Monday.

About.com (Nasdaq: BOUT) for growing traffic and gaining momentum. The company creamed estimates in the fourth quarter, but still reported a hefty loss of 57 cents a share. But the sales growth was impressive. About.com reported sales of $13 million.

Homestore.com (Nasdaq: HOMS) for extending its current alliance with the National Association of Home Builders. It doesn't sound like much, but Homestore.com is a realtor referral service, and one of its biggest sites depends on the NAHB for content.

Ticketmaster Online-CitySearch (Nasdaq: TMCS) for coming up with an innovative print tickets at home plan. This stock is frequently overlooked, but is a key e-commerce player. Toss in strong local content and TMCS is a company on the rise. Now if it can change that unwieldy name.