SGI Files for Bankruptcy

The veteran supercomputer maker hopes a reorganization will lead to $250 million debt reduction.

Silicon Graphics is filing for bankruptcy protection as it continues a reorganization designed to bring the struggling hardware maker back to financial health.

The Mountain View, Calif., company on May 8 filed for Chapter 11 protection, saying it was a key step in the reorganization that is aimed at reducing SGIs debt by about $250 million. The filing occurred at the federal Bankruptcy Court for the Southern District of New York.

Company officials say they will file their reorganization plan shortly and expect to come out of bankruptcy within the next six months.

"We want to assure our customers, our employees and our communities that SGI is operating—business as usual," Chairman and CEO Dennis McKenna said in a statement. "Our customers can continue to rely on SGI for its mission-critical products, services and support."

Industry observers are not so optimistic about SGIs future.

"Its hard for me to see, given how SGIs been performing over the last few years … they can survive as an independent entity," said Gordon Haff, an analyst with Illuminata, in Nashua, N.H.

SGIs decision to go into bankruptcy comes two months after the company announced it was laying off about 250 people—or 12 percent of its work force—as part of a plan to save $150 million by the end of the year. According to the company, initiatives put in place since the beginning of the year have already netted $100 million in savings, with the other $50 million under way.

/zimages/2/28571.gifClick here to read more about SGIs recent round of layoffs.

In addition, in early February, SGI—once a major player in the HPC (high-performance computing) space—filed a 10Q regulatory document with the Securities and Exchange Commission outlining a bleak financial situation and indicating that possible future moves could include putting the company up for sale or bankruptcy.

McKenna was appointed chairman and CEO in January and immediately began implementing a series of changes designed to nurse the company back to health.

According to SGI, the company already has streamlined its manufacturing processes, improved its product road map and refocused its portfolio. In March, an SGI spokesperson said the company was consolidating its server and visualization product lines, relying more on partners to address customers visualization needs.

"We expect to proceed quickly and will emerge from these proceedings with a significantly improved balance sheet and, as a result, greater operating flexibility," McKenna said in the statement. "I am confident in SGIs future. The new direction I have set is comprehensive, the product portfolio we will unveil is expansive and our dedication to customer satisfaction is unwavering."

SGI has been hobbled by changing demands in the HPC space and the lack of a broad product portfolio to offset those changes.

"Over the past few years, there just arent enough people willing to spend a premium for big scale-up supercomputers to support a company like SGI," Haff said.

HPC workloads that had been done on the big machines are shifting to clusters of smaller x86 servers running on processors from Intel and Advanced Micro Devices, he said. And unlike competitors like IBM, SGI doesnt have the commercial business to fall back on.

Haff compared SGIs market situation with that of another supercomputer maker, Cray, which also is trying to expand its footprint to offset the move away from expensive, high-end systems in the HPC space.

The clustering trend "just doesnt offer a huge opportunity for SGI to really have a solid business model," he said.

SGI on April 25 reported preliminary financial figures for its fiscal third quarter of $108 million in revenue, less than the $140 million to $160 million it expected. The company will announce official numbers on May 9.

McKenna attributed the disappointing numbers to the inability to close a number of deals, the drop in sales of visualization products after the companys announcement that it was not going to continue development of them, and the ongoing publicity around its financial situation.

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