By William Fellows
Silicon Graphics Inc’s grim third quarter – it lost $39.95m on declining revenue of $619.17m – was caused primarily by a shortfall in the amount of business it did on its new Windows NT workstations; it brought in around $35m, 50% less than it had hoped. SGI blamed yield difficulties, a slow sales ramp and build-to-order (BTO) difficulties (it outsources manufacture to SCI Systems Inc). We failed to deliver on our key objective, revenue growth, SGI said. Revenue from sales of its Origin business was down because of customer confusion over strategy and competition, although the server business grew, largely because SGI was at last able to fulfill orders for systems using the new R12000 MIPS RISC. The Onyx workstation business was up 5% year over year while Origin servers were down 10%. Gross margins were 41.9%. So what’s SGI going do to pull itself up, apart from changing its name to SGI, a campaign that has supposedly cost it $3m?
First, it will sell a further 7 million shares in its MIPS unit in a second offering expected to raise $300m next month. It will retain 65% of MIPS, down from 85% now but will sell the rest, worth some $1bn by the fourth calendar quarter of next year. That will give it a considerable war chest. It ended the quarter with $670m cash.
SGI said it is also going to take steps to maximize it software portfolio. SVP corporate operations William Kelly told ComputerWire that there are a number options being considered to free-up captive software including discontinuing some lines, selling off or spinning out others – Alias/Wavefront is an obvious candidate – and striking third party relationships to advance other efforts.
It says that it is now in a position to meet demand for NT workstations (having delayed then by re-designing the motherboard) and is promising a 48 turnaround for BTO shipments. It’s going to keep the two popular fixed-function configurations of the NT boxes in hand. NT products should garner $300m revenue – 60,000 units – by the end of the financial year. As far as high-end NT is concerned SGI has already said it plans to be able to run Microsoft operating systems on its next-generation IA-64- based ccNUMA SN servers, though how much ccNUMA stuff gets in is mostly up to Microsoft, it says.
It has set in place a number of changes in the sales force and its regional businesses, including restructuring Europe and implementing a two-tier sales model for desktops and servers based around solutions marketing. It has overhauled its commission model and has set up what CEO Rick Belluzzo calls a war room to track all sales opportunities.
To reassure its server customers it has secured the help of an as-yet unidentified process partner to develop what it said were two further versions of the MIPS RISC, which it said it wouldn’t have been able to do without significant investment of its own. In other words it’s going to put two additional generations of the MIPS processor through a smaller design process. The original roadmap petered out at 2000 with the R14000 successor to the current R12000. Now it will have 600MHz R16000 and 800MHz R18000 (some places referred to as an R16000 shrink) designs made. This means MIPS-based Origin servers are going to be longer than originally planned, ensuring that customers don’t have to make any nightmare software transitions in the near or medium term. Origin/Irix development is likely to tail off around 2005. Cray servers are currently around 15% of server revenue and declining.
SGI’s Intel server is due early next quarter. It will offer four and eight ways running NT or Linux, which SGI implied is going to be much more important for it than originally thought. Linux is the opportunity, Belluzzo said. Instead of announcing vaporware at Comdex last week Kelly said SGI has decided to wait until the Linux box is actually available – in July – before announcing it publicly. It will differentiate its Linux offerings with scaling, networks and provision of packaged, long-term global support out of the box. Kelly said SGI isn’t investing in one of the Linux shops for expertise like a clutch of other vendors have done but will draw on its 2,000 or so Irix Unix people. The gist of it is that it is not having a third party do its work for it.
Sensibly, it’s also going to be more conservative with its expectations for growth. Fourth quarter revenue will be down year over year; break even would be a stretch. First quarter revenue growth will be in the mid-teens, it will be in profit by the end of the second quarter and will be back in black for the full fiscal 2000 which ends June 2000. It claims it’s on course to beat the $200m expense reduction it promised last year and has 9,254 employees. The US accounted for 53% of revenue (down 14%), Europe 26% (down 14%) and rest of the world 21% (down 16%). Product revenue was down 18% at $455m while service revenue was up 9% at $164m.
