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CEO quits SGI; 1,000 may lose jobs

Silicon Graphics announces that longtime chairman Edward McCracken will step down and that it will lay off up to 1,000 employees.

PALO ALTO, California--Silicon Graphics (SGI) announced today that longtime chairman and McCracken: It became personal chief executive Edward McCracken will step down and that the company will lay off up to 1,000 employees.

McCracken, who has been with the company for 13 years, will stay on as chairman, but will give up the chief executive role once his successor is named.

Silicon Graphics, which currently has a workforce of about 11,000, said it will lay off between 700 and 1,000 employees worldwide beginning in the next few weeks. SGI earnings (revenue and net income) The layoffs could affect up to 10 percent of the company's workforce and will include contractors. SGI also said it will take a $50 million charge in its December quarter, largely as a result of the layoffs.

"We need to make a number of changes," McCracken said. "We are re-sizing the company, and...let me assure you that we are looking at all stages of the organization [for the downsizing], and we are starting at the top. We want to reduce the number of levels in the company."

"This is a painful but necessary move," said David Wu, senior analyst at ABN AMRO Chicago. He added that it is difficult to say if the cuts go deep enough, noting that one indication will be the company's future financial performance. "The company's technology is not an issue, but there are a lot of other things the company needs to do," such as get costs under control, he said.

In a frank mea culpa to investors attending the company's annual shareholders meeting in Palo Alto, California, McCracken detailed SGI's problems during recent quarters and outlined its prospects for recovering from those difficulties. He pledged to bring in outsiders in an effort to bring new thinking to SGI top management

McCracken also acknowledged that there had been a difficult transition in SGI's entire product line, which resulted in "inconsistent performance," poor results in the most recent quarter, and a decline in SGI's stock price.

"We probably bit off more than we could chew," McCracken said of SGI's efforts to completely refresh its product line while absorbing the acquisition of supercomputer maker Cray Research. "It turned out in the end that we cannot do that."

McCracken's resignation comes as no surprise. Rumors have circulated for several weeks that the CEO was likely to step down, as the company wrapped up its second year of consistently missing the mark on Wall Street's estimates. The company's poor earnings results had significantly reduced McCracken's credibility on Wall Street.

"The board understands and respects Ed's decision to change his role in the company at this time," James A. McDivitt, a member of SGI's board of directors since 1987, said in a statement. "Ed has made a remarkable contribution in building Silicon Graphics, and we value his vision and achievements.... We believe the company is addressing the operational issues that have affected its performance and want to express our support for the management team in implementing the company's plans."

SGI has seen its profits fall off since its peak of $224.9 million in 1995, when its high-end workstations took the Hollywood special-effects industry by storm. The company reported earnings of $78.6 million in its last fiscal year.

SGI stock performance

And in its first quarter, which ended September 30, the company reported a net loss of $56 million, compared with a loss of $22 million a year ago. Excluding an acquisition charge for ParaGraph International, the company would have posted a loss of $37 million. SGI earlier this month had warned analysts that its first-quarter results would fall short of expectations and that it would report a loss. Wall Street initially had expected a slight profit.

"The high points [of McCracken's tenure] were when he brought the technology forward in 1995 and essentially created the truly high-end computer platforms that opened [the market] up for high-end graphics," said Daniel Kunstler, an analyst with J.P. Morgan Securities.

After SGI's 1995 peak, McCracken realized the company needed to expand its offerings, and decided to follow the business model of Sun Microsystems, which had expanded beyond workstations and into servers.

"They had pressure to go faster and faster in terms of developing technology and bringing products to market quickly," Kunstler said. "That tested the execution of the company and they really faltered under that kind of pressure."

As SGI developed its servers and came to count on sales of those servers to drive its business, the sales did not materialize.

"They had geared up their business for the servers, but they didn't have the right sales and marketing," Kunstler said.

Indeed several analysts noted that SGI, which had developed a brand name for its high-end workstations, has yet to accomplish a similar feat with its servers.

But McCracken said the company was becoming more aggressive in its marketing strategies. He also spoke of the effect Microsoft and Intel have had on today's computing market. He said competitive pressure from those heavyweights in part prompted SGI's move from offering a solely Unix operating system to offering Windows NT machines as well.

"It's difficult to find differences now between the PC space and workstations," McCracken said. He added that the Unix workstation market is in decline, although Silicon Graphics has managed to increase its market share in that sector--a situation similar to becoming a big fish in a shrinking pond.

Silicon Graphics' business model now assumes the presence of a high-bandwidth "gigabit network," a fast way to move computer data from one place to another, which McCracken said plays into the company's key competency--"big servers with high bandwidth."

For the time being, SGI will continue to focus on its core markets, supplying workstations to graphics, oil, and gas companies, as well as to the manufacturing, scientific, technical, and entertainment fields.

The company's consulting services, which today represent 15 percent of total revenues, will move to 30 percent of revenue in a few years, as SGI moves to "solutions-based partnerships," McCracken said.

Gary L. Lauer, executive vice president of worldwide field operations and president of the company's world trade corporation, also announced his resignation at today's shareholder meeting. SGI said Robert H. Ewald, executive vice president of computer systems, will serve as acting chief operating officer, with responsibility for product development and manufacturing, sales, and marketing.

Meanwhile, shareholders were somewhat surprised by the extent of the layoffs that were announced. Rumors initially pegged the layoffs at around 500 employees.

"It is hard to downsize. On the other hand, our shareholders would prefer that we take the necessary actions, and we are taking those steps," McCracken said.

But one unhappy shareholder expressed a different view. "I am unimpressed with the management," the shareholder said. "The management didn't grow as the company grew. [McCracken] should make a clean break and step down immediately. I think it would be difficult to put someone in your place and have them do a worse job then you have been doing over the past couple of years."

"This is a financially strong company. If it is the right thing for the company, then I will certainly step to the side," McCracken responded. "I am committed to making sure that this company has a bright future."

Bill Kelly, SGI's senior vice president of corporate operations and general counsel of SGI, said the company does have a bright future, but that it will take some time before the upside emerges. "SGI had hoped to grow at 50 percent, but it does not look that achievable," he said. "Our operating expenses are $400 million per quarter and we want to reduce it by 10 percent or $40 million. We will not achieve it this quarter, but hope to in quarters beyond that."

SGI plans to hold a meeting with its employees tomorrow.