August 23, 2000 6:45 PM PDT

SGI chief executive trying to cure past ills

SILVER SPRING, Md.--The request came a year ago, and the recipient took just a few days to answer.

SGI's board of directors wanted Bob Bishop to replace the departing CEO and to steer the company in a new direction. He took the weekend to think over the offer and started work that Monday--one year ago today.

That's the story according to Bishop, who met with CNET News.com today at the offices of SGI's federal government division outside of Washington, D.C.

A year following his ascension to CEO, Bishop runs a very different SGI than predecessor Rick Belluzzo. It's been a gut-wrenching year of tough decisions, many of which put Bishop in the hot seat with investors and Wall Street analysts.

The 18-year-old server maker, once known as Silicon Graphics, became a star among movie studios, government agencies and mechanical engineering departments in the early 1990s. In the mid-1990s, the company tried to expand from its core customer base, but it has since been forced to scale back its ambitions.

During his yearlong tenure, Bishop sold SGI's Cray supercomputer operation, spun off its MIPS chip manufacturing division, and cut loose two major software divisions, including one immersed in video streaming across computer networks. He also watched the company's stock plummet. It closed today at $4.88, down nearly 50 percent for the year.

"The honeymoon period is over for Bob, and it's do or die," Technology Business Research analyst Jim Garden said. "We're hopeful they can engage going forward and be viable, but we sense still a few potholes in the road."

Those potholes include turning a company that by all appearances is running from profitability into one that can compete with the likes of IBM and Sun Microsystems selling big-iron servers.

The Mountain View, Calif.-based company, which employs about 6,800 people, got its start by selling servers to NASA and still pulls in nearly a quarter of its revenue from government agencies. The company is best known for selling servers used for compute-intensive operations, such as weather forecasting and computer animation. SGI servers, for example, were used for two recent movie releases, Disney's "Dinosaurs" and "The Perfect Storm."

SGI's fortunes
But success in these niche markets has not been enough to turn around SGI's fortunes.

SGI's fiscal 2000 fourth-quarter results show a company still in crisis but on the mend. Revenue dropped 36 percent year-over-year to $534 million. The company lost $608 million for the quarter ended June 30, compared with a net income of $158 million a year earlier.

"That works out to the largest quarterly loss in the history of SGI," Garden said.

For the year, SGI had revenue of $2.3 billion, compared with $2.7 billion in 1999, but it posted a loss of $834 million, compared with a $54 million profit a year earlier.

The unloading of nonessential operations and retrenching along three areas--"stability, position and growth"--should make SGI profitable in fiscal 2001, Bishop said. He predicted revenue growth of 15 percent to 20 percent and a doubling of revenue within three years.

"Emotionally, the company has turned," Bishop said. "Motivation in the company is quite high, and we're refocused as a single-mission company."

Analysts skeptical
But analysts are raining on Bishop's parade.

"I don't know why he's so optimistic," Gartner analyst Paul McGuckin said. "When it comes to the core business...the market at large and the enthusiasm of software developers, SGI has definitely been waning."

To reach its revenue goals, SGI has committed resources to two areas:

 Big servers that run on MIPS processors and on the company's Irix flavor of Unix

 Open-source Linux running on Intel processors

Within five years, the company expects revenue to be even between the two areas, Bishop said.

But Garden faulted the strategy, at least in how it applies to SGI-branded products. In unloading its assets, the company refocused on two niche markets: technical and creative computing users, and big data such as video archiving and production.

"SGI is following what we've dubbed the 'back-to-the-future' strategy--going back to where they were about five years ago," Garden said.

SGI customers, like those for Apple Computer's Macintosh, tend to be a close-knit and dedicated group. But the company's mixed message on strategy has eroded the ranks of the faithful, Garden said.

One problem is SGI's flip-flop on Intel-based PC workstations. Once touted as the company's salvation, SGI unsuccessfully tried to unload the product line.

Linux on Intel
The company's decision to offer Linux on Intel processors also smacks against SGI's core group of customers, although Bishop made it clear the company's MIPS-Irix strategy is separate from anything it does with Linux. "We're not putting Linux on MIPs," he said.

"What I'm seeing in this back-to-the-future strategy is the user base may have become disenchanted," Garden said. "That's the problem we see with this...strategy and why they need to embrace the Internet strategy, which is a go-forward strategy."

But the company's Linux plans are very much about the Internet, Bishop said. "Linux will be the gateway to broadband Internet," he said.

With Linux entrenched on Web servers, delivery of movies and other forms of entertainment over broadband is a natural fit, Bishop said. "Instead of e-commerce we should be talking about media commerce, or m-commerce," he said.

SGI's chief executive believes the company's history providing compute-intensive servers, which are popular among movie studios, makes it a natural fit in the m-commerce era.

"That's a story that's very similar to the one they've been telling for years, although Linux is different," Gartner's McGuckin said. "For SGI to attach as much as it has to Linux--essentially tying their wagon to the Linux star--that's a very risky endeavor on their part."

Garden sees other problems, such as that many service providers are starting to do video streaming over the Internet and have already settled on servers from Sun or are using Intel processors. "Where the rubber meets the road, somebody else is already entrenched," he said.

Long-awaited server
Still, Bishop remains energized, particularly as he looks at SGI's product lineup.

SGI last month introduced the long-awaited Origin 3000 server.

The server is built around a modular architecture of, in SGI lingo, bricks for swapping in CPUs, communications slots, graphics accelerators, hard disks and other components. The Origin 3000 uses a technology called nonuniform memory architecture (NUMA). IBM also offers NUMA technology, which distributes memory into numerous small islands instead of one large block and in SGI's design can accommodate as many as 512 CPUs.

"There's no question they can build powerful servers," McGuckin said. "The problem comes in the price tag, the third-party software vendors and just the whole visibility SGI has in the market. Competitors who a year ago couldn't touch SGI in terms of performance are quickly catching up."

As an example, McGuckin pointed to next-generation, big-iron servers due from Hewlett-Packard in September and from Sun in about nine months.

For Bishop then, the year ahead may pose as many difficulties as his first on the job, McGuckin said.

Bishop said he is ready.

"We're going to battle here. We're going to war."

 

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