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SGI right at home in red ink

Supercomputer profits not so super

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The economic downturn is making an already difficult financial situation for supercomputer maker Silicon Graphics even more arduous.

For the second fiscal quarter ended in December, SGI reported revenues of $82.8m, down 8.1 per cent. Product revenues, including those from SGI Japan (which the company only owns 10 per cent of these days after spinning most of it out to its reseller in that country), amounted to $39.7m, down 8.5 per cent, with services sales coming in at $43m, down 7.8 per cent.

The company's operating loss grew to $38.2m from an operating loss of $30.8m in the year-ago quarter. The operating loss this time around was expanded by $10.7m in restructuring costs. SGI announced back in mid-December that it was cutting 15 per cent of its 1,500-person workforce. The net loss in fiscal Q2 came to $49.2m, larger than the $42.2m loss from a year ago.

The supercomputer business has always been choppy, given the high price of machines, the small number of customers, and the capriciousness of budgets. But SGI's financial problems are not just due to choppiness. The company hooked its fortunes on Intel's Itanium processors and Linux years ago and is now struggling to build up a business based on mainstream Xeon processors.

While SGI gets style points for the technology in its Altix Itanium and Xeon machines, making the case for its products gets harder as its financial woes continue. SGI did much better when the US government was afraid of Japanese imports - not cars, but NEC and Fujitsu supercomputers.

SGI exited the quarter with $36.1m in cash and equivalents, about the same as it had in September. But its long-term debts grew to $157.4m, up 35.2 per cent from the debt levels in September.

The good news is that SGI's bookings were $68m in fiscal Q2, up from $58m in fiscal Q1 ended in September. But a year ago, bookings were $100m. In Q2, SGI said bookings were strongest in the government sector, particularly for supporting defense applications.

Bo Ewald, chief executive officer at SGI, is praying for various stimulus packages - particularly that being fought over by President Obama and the Congress right now - will help bolster the company's future business. "Governments around the world are beginning to take actions that should increase investments in IT spending in core government R&D programs," explained Ewald in a statement. "Many of our existing customers should see additional budgets and we are hopeful that we can serve their increasing needs."

Like many server makers, SGI is hoping to get a little business once Intel delivers its "Nehalem" family of Xeon processors, which are expected in March if all goes well. At the SC08 supercomputing show last November, SGI was showing off its future Altix ICE blades based on Nehalems. The company was tight-lipped about its plans for supporting Intel's "Tukwila" quad-core Itaniums.

"We are committed to global shared memory and moving forward with new processors," Michael Brown, sciences segment manager at SGI, said with a smile at the time.

That could mean SGI was shifting the NUMAflex global shared memory to Nehalem chips using QuickPath Interconnect and ditching Itanium altogether. As we reported yesterday, Intel has delayed shipments of the quad-core Tukwila Itaniums until mid-2009, which means server makers like SGI won't be able to ship products using Tukwila until a month or two after since they need to qualify the chips in their systems.

It is hard to say if SGI's revenues in the quarter would have been better if Tukwila had shipped in mid-2008 - given the state of the global economy. But one thing is certain. SGI would have had a better chance of doing business if Intel didn't have disruptive delays in Itanium launches over the past decade. If Nehalem and Tukwila get out the door by summer and SGI has them in updated Altix systems, then this will at least give the company a fighting chance to chase all that stimulus dough.

A few big orders can turn the company around, even if it cannot wipe out the red ink from fiscal 2008, 2006, 2005, and 2004, which totals $474.5m against sales of $2.44bn for those years. Fiscal 2007 is a good target to shoot for, when SGI had $462.9m in sales and brought $222.6m to the bottom line. Again, those numbers were only good because of a chapter 11 bankruptcy rejiggering. ®

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