SGI shares plummet as deal closing malady lingers

Eyes penny stock status

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SGI today lurched towards penny stock territory after announcing a huge fourth quarter revenue miss.

The server maker, in a preliminary forecast, warned investors to expect revenue between $170m and $175m for the period. Previously, SGI had predicted revenue to come in between $180m and $200m. Shares of SGI dropped more than 15 per cent, at the time of this report, hitting 59 cents - a new 52-week low. For the quarter, SGI expects to post a loss of approximately $15m to $18m.

SGI blamed the unexpected shortfall on its failure to close two large deals worth more than $15m. "The Company is working diligently to finalize these installations."

No kidding.

In an ominous note for employees, SGI warned that it is "closely reviewing its expense structure and expects to adopt additional restructuring actions this quarter" as a result of the revenue miss. It, however, seems odd to blame a couple of slow-closing deals for the bad quarter only to insist later that the whole company must be restructured to avoid revenue misses in the future. Which one is it? One-time problem or large scale issues?

SGI has tried to revitalize its business by moving away from homemade processors and its specialized IRIX operating system to Linux running on Intel's Itanium chip. Itanium sales, however, have fallen painfully below expectations - so much so that analyst powerhouse IDC missed a 2004 Itanic sales forecast by 95 per cent or $26.6bn. Oops.

The only company to enjoy anything approaching recent success with Itanium is HP, which owns the vast majority of the Itanic server market.

SGI continues to have a stellar reputation in its core market, delivering high-performance systems to labs and companies in need of serious graphics horsepower. And with SGI's market cap at just $157m, one wonders how long the likes of IBM or Sun Microsystems can resist adding this compute hungry customer base to their server lines.

SGI will report full fourth quarter results on July 28. It blamed a failure to close deals for a third quarter miss as well

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