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SGI chief hints at next steps in comeback

In two weeks the company will detail its Linux plans, possible partnership deals, and an overall product and services strategy for the Internet.

Computer workstation maker SGI will provide an update to its recovery plan in two weeks, detailing its Linux approach, possible partnership deals, and an overall product and services strategy for the Internet, according to chief executive Rick Belluzzo.

The changes are part of the company's long-term effort to return to sustainable profitability by moving to embrace expanding markets and adopting cheaper systems based on Intel chips and operating systems like Windows NT and Linux.

"You always have to change course and adapt," Belluzzo said in an interview with CNET News.com. "We will do that. You have to build off what you've already done and be responsive to market conditions."

SGI's origins and most glorious history came from its high-performance graphics workstations, used by graphic artists and engineers. These machines were used to produce the eye-popping special effects in movies like Jurassic Park and Lost in Space.

The company then expanded, adding server computers into its product lineup and buying chipmaker MIPS and supercomputer firm Cray Research. But after riding high, SGI faltered, and this quarter's profit was the first after seven consecutive quarters in the red.

In a nutshell, increased competion in the workstation market began to hurt the company, and some questioned if their acquistion strategy made business sense.

The shrinking market share forced a strategic shift to mainstream Intel chips and Windows NT in both servers and workstations, where before they'd concentrated on using MIPS chips and Unix. But the market hasn't fully responded to these changes.

As part of its recovery plan, Mountain View, California-based SGI has been cutting jobs, de-emphasizing the Cray computers, trying to raise the profile of its Unix server line, and selling data visualization tools to businesses as well as scientists.

Belluzzo's plan bore its first tangible fruit Wednesday when the firm revealed a surprise profit of 12 cents per share for the most recent quarter, through cost-cutting and increased sales of its higher-end Origin servers.

Though Belluzzo, named CEO in January of 1998, declined to offer specifics, he said the changes would be announced August 5, and he offered some hints at what's in store:

• "We need to get more Internet-focused," he said. The company sees opportunities for single-function "appliance servers" and in the "application hosting" strategy of paying for access to complex business software, instead of installing it in-house.

• "We need new partnerships...to address our ability to take our technology to the market more broadly," Belluzzo said. He likened the situation to SGI's partnership with Nvidia, which makes 3D graphics chips for the mainstream computer market.

• The company will contribute work to beef up the Linux operating system so it supports SGI's ccNUMA architecture, SGI's take on a method for designing services that allows a manufacturer to cram hundreds of processors into one machine. The credibility of NUMA (non-uniform memory access) as a concept has risen in light of IBM's plans to acquire NUMA server maker Sequent, he added.

• The company will focus on a smaller number of markets. "We still do a lot of things in a lot of areas," but SGI likely will focus on areas where it can do well and differentiate itself from competitors.

Linux is key
SGI plans to introduce its new Intel-based servers in early August running both Linux and Microsoft Windows NT operating systems, the company has previously said. But according to Merrill Lynch analyst Steve Milunovich: "SGI will lead with Linux but offer Windows NT as an add-on."

"We think Linux is important," Belluzzo said. "We think it's the operating system of the Internet. The opportunity is to make Linux more powerful, which we intend to do."

However, SGI's Linux plans took a hit recently, with TurboLinux hiring away Dave McAllister, an eight-year SGI employee who helped chart SGI's Linux plans.

Business issues
While Belluzzo was pleased with the profitable quarter, he was cautious about whether the company's upcoming quarters would be similarly rosy.

"The first quarter seasonally is always a tough quarter," he said. But because the company has a backlog of orders, "We feel we're pretty well positioned. But we still have more work to do to have sustainable profitability on a quarter-to-quarter basis."

Dan Niles of BancBoston Robertson Stephens said he believes SGI is in good shape to break even or be profitable next quarter. "The fact that the Unix business is so strong gives them a little bit more flexibility," he said.

One hitch was a slower-than-expected increase in sales of the company's Visual Workstations, which use Windows NT and Intel chips. "The Visual Workstation is continuing to ramp [grow], but...not at the rate we would like," Belluzzo said. While SGI's Unix workstation shipments sold better than the company expected, the products didn't bring in as much as during the same quarter last year, he added.

Analysts were more forthright about the Wintel workstations. "They underperformed big-time relative to expectations," Niles said. Milunovich said the workstation sales brought in $50 million in the last quarter, which is at the low end of expectations.

Sales of SGI's Origin servers were up 35 percent compared to the same quarter the year before, Milunovich said, helped by more orders, two big government contracts, the new R12000 processor, and a sales force working harder.

Sales of the Cray supercomputer line continued to decline, dropping 50 percent compared to the year before, he added. "Cray sales...now represent less than 10 percent of corporate revenue," he said.

Separately, SGI still owns 65 percent of MIPS, a chip design company SGI spun off. SGI's stake currently is worth $1 billion, the analysts said.