SGI: Still Hanging Tough

By Chris Preimesberger  |  Posted 2005-11-08

SGI: Still Hanging Tough

MOUNTAIN VIEW, Calif.—Monday was the first day since 1986 that the stock of Silicon Graphics Inc., better known as SGI, has not been traded on the New York Stock Exchange. Its recent delisting is just the latest chapter of a long, painful story that analysts say is loaded with lessons for other companies.

However, company executives say SGIs customer base remains loyal and its technology base is strong enough to sustain it, albeit in narrow vertical markets.

SGIs stock, which closed Friday at 46 cents per share, had been selling for under $1 since last May, when the exchange notified the company that its common stock had fallen below the minimum share price standard for continued listing. The NYSEs standard requires that a companys common stock trade at a minimum average closing share price of $1 during a consecutive 30-day trading period.

SGI is now being traded on the small-cap Over the Counter (OTC) Bulletin Board.

"While SGI has been listed on the NYSE, a significant amount of our trading volume is currently executed off the NYSE. We believe there will be a seamless transition to OTC, and this change does not affect our operations. The bottom line is that we remain focused on our customers and business objectives," offered SGI spokeswoman Caroline Japic.

"At the beginning of the fiscal year, we outlined three primary objectives: refinancing for improved liquidity, significant cost reductions, and revenue generation plans. As we announced last week, we are on track with the milestones we set for ourselves in these areas, although our plans will take several quarters to be fully implemented. Specifically, we met our revenue targets for the September quarter, initiated our restructuring and cost savings plans, and on Oct. 25 announced that we had completed a new asset-based credit facility, which significantly improves our liquidity," Japic continued.

Still, SGI lost $19 million last quarter and expects to lose somewhat less this quarter. This is a company that earned $730 million in 2004 and made more than $3 billion in 1997, its peak year.

What happened? Progress, according to some.

SGIs Heyday

Ten years ago, on July 12, 1995, SGIs stock price peaked at $45.25 per share—about twice what Microsofts was selling for at the time. At the time SGI was one of the largest, most well-equipped companies in the IT business with one of the most attractive campuses anywhere. It employed about 12,000 people in locations around the world and was the darling of the motion-picture business, since its powerful workstations were fit for designing and rendering special effects and animation.

The company also sold systems in the medical imaging, military and government sectors. It still does today, but on a much smaller scale.

The Navy enlisted SGI supercomputers and storage technology in tsunami relief work. Click here to read more.

That was then. Now, SGI still sells high-end computing platforms and components (such as shared memory systems). It has also shed about 80 percent of its staff, down to 2,200 employees. The company makes a good chunk of income from being Google Inc.s landlord. SGI leased its entire original campus to the Internet services company in 2003 for $14 million to $17 million per year and has relocated to more modest—but still impressive—accommodations a half-mile away.

Some in the industry find irony in that situation. SGI, with its proprietary workstations that used to sell for $10,000 to $40,000 apiece, has been supplanted by a newcomer that runs its Internet business largely on inexpensive Linux-run machines in huge server farms.

How did SGI nosedive so far in less than a decade? According to some analysts, vision, or lack thereof, played a large part in all of this. Others point to the advent of Linux. Virtually all say that simple bad luck was involved throughout.

"SGI essentially got pushed out of the market," Jupiter Research analyst Michael Gartenberg told Ziff Davis Internet. "It stuck to making dedicated, high-end computer workstations, when good-performing, standard PCs were coming along at much cheaper prices. For a long time the company failed to realize what was happening, and by the time it did, it was too late."

Next Page: Before the Internet, things were very different.

Before the Internet

Before the Internet, Things Were Very Different

In February 1993, ARPAs Internet was alive and being used by academics and the military but years away from being embraced by business and the general public. There were no user-friendly browsers; Marc Andreessen was still creating his Mosaic GUI browser (eventually to become Netscape) at the University of Illinois. The stable version of the Netscape browser didnt arrive until December 1994.

In early 1993, computers were run on a client/server, local wired network or independent basis only; the great information highway wasnt yet in place to connect them. Cisco Systems Inc., Sun Microsystems Inc. and other companies were scrambling to put these connections in place, to try and convince people that the network was the future.

During this pioneering scramble for the new, network-based IT that would eventually morph into the Internet we have today, SGI stayed the course. It was doing good business, producing high-end, 64-bit Iris-branded workstations (with the Unix-based Irix operating system). The systems sold for $10,000 to $20,000 (and higher). Quality was the key, and price was no object for companies that had the money to invest.

The company had a reputation for providing the finest, highest-resolution computer graphics in the industry. This is the company that pioneered 3-D graphics technology and still is the recognized leader in that segment today.

Clinton and Gore Come Knocking

Fresh off their victory, Bill Clinton and Al Gore made an early joint post-election appearance on Feb. 22, 1993. Air Force One and Two landed at Moffett Field Naval Air Station here, and the two men took the short drive over to Shoreline Blvd. to visit the hottest company around: Silicon Graphics.

The occasion? To do some cheerleading and let the Silicon Valley—and the world—know that Washington was going to support R&D in the information technology business with all the tax-advantage spending muscle it could muster. Then-CEO Ed McCracken of SGI took the stage with the nations chief executives, basked in the glare of the television cameras, and did his part to provide sound bites for the media.

SGI, the computer graphics leader, was on top of the world. But just two and a half years later, following the acquisition of Cray Research Inc., SGIs stock started a slide that has resulted in Mondays action by the NYSE.

SGI, started in 1980 and incorporated in 1982, was founded by Jim Clark (who later founded Netscape) and a group of seven others. It originally focused on making applications-oriented silicon chips. The Defense Advanced Research Projects Agency (DARPA) "geometry engine" led to SGIs focus in 1983 on being a computer terminal company. In 1984, when McCracken became CEO, that focus was shifted to workstations, and in 1986 the company went public.

SGI products in 1986 focused on the desktop. In 1988, SGI introduced the Power Series servers, which became the Challenge line in the 1990s. In 1992, the company shipped its 100,000th workstation, and it reported $1 billion in revenue in 1993. Steven Spielbergs movie hit, "Jurassic Park," was released, having been rendered on SGI workstations. The Disney/Pixars landmark "Toy Story," also made with SGI machines, was in the works, to be released in 1995.

SGI did everything itself, from designing and building the software and hardware, to custom-designing the chips. It even had a subsidiary that made its own custom glass for its 3-D workstation screens.

But following the Cray merger, engineered largely by McCracken, the stock price began to slip. The company found it couldnt compete with the newer, faster Windows NT-based and Sun Solaris workstations coming on the market, and the powerful Cray supercomputers couldnt be sold to just anybody. Competition from a horde of heavyweights selling less-expensive, ever-more powerful computers, such as IBM, Sun, Hewlett-Packard Co. and Compaq, proved too much to overcome.

"PCs were still toys in 1995," Gartenberg said, "especially compared to the high-end machines SGI was building. The company also didnt foresee that PCs would get as fast as they did as quickly as they did. SGI basically ignored Moores Law."

It proved a conundrum for SGI.

"Were were going to build the worlds fastest NT server," longtime SGI executive Greg Estes told Ziff Davis Internet, "and use our own chip set and graphics apps in it. But these became a commodity so quickly—who knew? We would have been the fastest for a couple of weeks, then second fastest, then third two weeks later. And there we would have been, with our proprietary chip sets soldered onto to the board, not able to compete."

Next Page: SGI overlooked key trends.

Overlooking Key Trends

SGI Overlooked Key Trends

The company also didnt foresee, as numerous other companies did in the late 90s, the advent of distributed computing power, or grid systems. Companies such as Oracle Corp., IBM, HP, Cisco Systems and Sun were early providers of those enterprise products and are now well-positioned for growth in that sector.

By 1997, SGI—hard hit by tough new competition, pricing pressure, and production and image problems, looked for a key partner to help it through the storm. SGI transitioned from making old-style MIPS-based machines to those with Intel processors, but the process was slow and costly. Delays in shipments of new chips—not SGIs fault, by any means—and in the transformation of production cycles turned out to be killers.

An alliance to collaborate on a new graphics architecture with one of its major competitors, Microsoft Corp., turned out to be a disappointment; the merging of SGIs signature OpenGL and Scene Graph graphics with Microsofts DirectX into a new entity, Fahrenheit, didnt work out and was soon dissolved.

When Linux began catching enterprise attention in the late 90s, Hollywood computer-animation studios realized they could do similar kind of high-end work on much cheaper computers. They began phasing out of SGI machines with expensive service contracts and licenses, moving to Linux "farms" with dramatically lower overhead costs.

Within three years, several of SGIs major customers—including Pixar, Industrial Light & Magic, and DreamWorks—were gone. The company began to downsize. SGI sold the Cray supercomputer portion of the company in 2000.

The downsizing continues.

"I hate using the word, but there was some arrogance of a kind," Estes said. "We had—and still have—great products, and we knew it. Its just that there was a limited market for what we built. We simply couldnt turn the ship around quickly enough to compete with the new-generation PCs."

When the downslide began, SGI attempted to move into other markets, such as Linux-based servers, storage and components. Success for its foray into storage and components remains to be seen. Its server business still has long way to go to catch up to its competitors such as IBM, BEA, Sun, HP and Microsoft.

"We had to learn to pick our battles," Estes said, "and use our core competence in ways that we know can succeed in the marketplace. We think we have some real value propositions in the storage area, for example."

Next Page: SGI today.

SGI Today

SGI Today

Today, SGI is a niche company and sells much of its hardware, software and services to the U.S. and foreign governments for projects it cannot talk about. It has been surmised that SGI sells high-end graphics and simulations programs to the CIA, for example, and the company does not confirm or deny that claim.

As an example of what its workstations can do, SGI shows a demonstration to potential customers that starts by showing the planet Earth from space on a 30-wide-wide, curved screen. In it, the "camera" starts heading steadily down—through the atmosphere toward North America, to the United States, to California, to the Bay Area, to the city of Alameda, to a shipyard, to an aircraft carrier—and finally to cars and people on the flight deck.

This is all seen in what appears to be a seamless, continuous camera shot. "Terabytes of information were used to create this one demo," Estes said. "No normal computer has near the capacity to run something like this."

Its not difficult to see why the military analysts would be interested in something like that.

Another section of the demo was a 3-D presentation of human DNA, which illustrated in great detail how diseased cells attach themselves to it in the early stages of cancer. Scientists can use these graphic representations to view disease at a microscopic level in order to find a way to attack the growth from literally all sides of the problem.

In addition, SGIs high-end graphics solutions are marketed to municipal governments and civil planning agencies. Another part of the demo showed a virtual tour of downtown Los Angeles, near Staples Center and the Convention Center. The "camera" appeared to be floating down a major thoroughfare, showing the city in great detail—sans cars and people. New buildings and trees and other landmarks then are popped into place, replacing empty lots, to show what an urban planner might do to help his or her clients visualize a new layout.

"Companies come to us to solve all kinds of unusual problems," Estes said. "For one example, how do you think Pringles potato chips get into that cylindrical can without being broken up? The value proposition here is that all the chips are exactly the same size and they are all intact.

"If you stack them up and drop them into the tube, the ones at the bottom will get smashed. We were asked how to figure the exact wind velocity on each chip as it is flown into a tube and flutters down into place without being cracked.

"Those are the kind of things we are often asked to do here at SGI. There are lots of other ones I could tell you about but cant for one reason or another," Estes said.

Therein lies SGIs major challenge: how to continue to sell its expensive, high-quality products and services into extremely narrow vertical markets.

"Can we continue to compete successfully in that area as a niche player? Definitely yes. Our customer base and income is solid. But we just need to continue to get our costs down to where we can get back into the black. And Im confident our road map will take us there," Estes said.

The company is continuing to find ways to lower production costs and has finalized a refinance plan that goes into effect soon, Estes said.

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