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SGI loss much worse than expected

SGI, a server and workstation maker in the midst of a seemingly interminable restructuring, plummets below analysts' expectations for its quarterly earnings.

Silicon Graphics, a server and workstation maker in the midst of a seemingly interminable restructuring, plummeted below analysts' expectations in quarterly earnings reported today.

Not including restructuring and other special charges, SGI reported a net loss of $68 million for the quarter ending September 30, or 37 cents per share. Wall Street analysts had expected a loss of only 7 cents a share, according to a poll of analysts on First Call.

The company's restructuring plan suffered a serious setback, as SGI couldn't find a partner to take over sales of its Visual Workstations, a new Intel-based computer line SGI had worked on for more than two years. The workstations were technically well-regarded, but they were hurt by delays, manufacturing problems, and the fact that SGI didn't have a network of dealers to sell the machines.

"We didn't find a partner to take over the existing inventory, so we decided to write it off," resulting in a $68 million charge in the quarter, SGI treasurer Bob Saltmarsh said. The company is in talks with other companies to take over future development of the line, but those machines won't be as different from the standard Intel-based computer as the current Visual Workstations are, he said.

The layoffs from the restructuring are finished, Saltmarsh added. A total of 1,100 employees lost their jobs. Including the $145 restructuring charge and the $68 million inventory write-off, the loss was $1.17 per share, the company said.

"It was a difficult quarter, made more difficult by the sudden departure of our former CEO," Saltmarsh said. "It put a lot of doubts in people's minds."

Bob Bishop took SGI's helm after the company announced its newest restructuring plan, the stock plunged, and Rick Belluzzo left his job as CEO to take a job at Microsoft.

While Bishop said earlier that the company planned to stay the course with the August restructuring plan, that plan hasn't moved far forward.

For instance, though SGI has chosen a financial partner to help set its Cray supercomputer unit on its own, that partner hasn't yet been announced.

"In the same place"
SGI still is in talks with the financial partner to help set up Cray as an independent company. "We're in the same place as a month ago," Saltmarsh said.

SGI doesn't expect to be profitable again until the quarter ending June 30, the company's fourth quarter of fiscal 2000, Saltmarsh said. There's a possibility that the third quarter will be profitable, but SGI isn't expecting it, he said. "Having reduced expenses, we're expecting a small loss [for the current quarter] which will go away as revenue grows," he said.

Revenues in the most recent quarter were $585 million, the company said. Saltmarsh said SGI expects revenues to stay the same for the current quarter.

The departure of Belluzzo derailed SGI's recovery, which was based in part on strong sales of its high-performance Unix-based servers. "Rick's departure set us back by a good three to six months," Saltmarsh said. "There's a lot of customer reassurance going on.

"The lesson from the foray into the Visual Workstation product is that it's tough to keep pace with the fast-changing world of Intel-based computers when producing a highly customized design," he said.

In the future, SGI's design will be much closer to the ordinary Intel machine. He described it as "black label, pretty much an [original equipment manufacturer] box with standard features and a special chip or card.

"The amount of investment it was taking us to differentiate from standard components was too high. We had about 200 engineers working on the [Windows] NT Visual Workstation," Saltmarsh said. "We had to have huge volume to make a profit."