Bankrupt SGI seeks better management

Analysts attribute company’s woes to leadership failures

Amid falling revenue and mounting debt, beleaguered high-end computer maker and major government contractor Silicon Graphics Inc. has filed for Chapter 11 bankruptcy protection.

“This is a prepackaged filing,” said Alison Ryan, senior director of business development and channel sales at SGI. “This will put us into a far sounder financial situation than when we started.”

Ryan said SGI is taking steps to inform all federal agencies about its situation, adding that she is confident the company will emerge from Chapter 11 proceedings within six months.

The restructuring plan includes the elimination of 250 jobs, or about 12 percent of the company’s workforce. Ryan said the company completed that part of the plan in March. SGI filed for protection May 8.

Many analysts were not surprised by the bankruptcy filing, and some were less sanguine about SGI’s future. Carl Claunch, vice president of research at Gartner, said regardless of how much federal business it has, SGI must have better management to stay alive.

SGI has “relied too much on big, one-off federal contracts,” Claunch said.

SGI has been a significant federal contractor for years, working with NASA, the Defense Advanced Research Projects Agency, the National Oceanic and Atmospheric Administration, and the Federal Aviation Administration, among other agencies. Some of SGI’s most significant government contracts include several Scientific and Engineering Workstation Procurement (SEWP) III deals under NASA. The agency awarded those contracts in June 2001, and they will expire July 29.

But NASA is confident that SGI’s troubles will not affect its performance as a major contractor. “We have had no issues with SGI in their performance of their SEWP contract,” said Joanne Woytek, NASA’s SEWP program manager.

Woytek said SGI informed NASA it was filing for bankruptcy protection.

The workforce reductions SGI completed in March did not include jobs in the federal division. That sector was one of the few to add workers, Ryan said.

Nevertheless, SGI’s problems have been brewing for a long time, analysts say.

SGI was outpaced by graphics card makers like nVidia and ATI Technologies, whose consumer-level graphics processors began to rival those of high-performance computer makers. High-end computer companies have been unable to offer the same low prices and cost-cutting standardization that general market products do.

Claunch said he blames the company’s troubles on its inability to manage costs, adding that the demand for standardization in government systems may be biting into SGI’s federal business. “It’s more cost-effective to go to standardized” processes, he said. “People should have already been planning a calm, orderly migration.”

Claunch said the only way for SGI to remain viable as a computer maker is to move away from high-end efforts and compete in the consumer market. He said SGI would struggle to continue relying primarily on federal contracting.

“With the right people and the right moves, they could be a player in the consumer market,” he added. “It’s all up to who the investors bring in to really turn it around. I think we need to see something more dramatic.”

Alan Webber, a senior analyst at Forrester Research, likened SGI’s bankruptcy to the approach of airlines such as United Airlines and US Airways, which have used Chapter 11 to remain afloat. He believes SGI’s future may be as part of another company.

“I think they’re going to get bought,” he said. Hewlett-Packard and Sun Microsystems are potential buyers looking to boost their federal presence, Webber said.

When Dennis McKenna became SGI’s chief executive officer in January, he promised to reduce debt through managerial changes and a 12 percent reduction in the workforce. Despite the changes, the turnaround has been slow. SGI recently released preliminary third-quarter earnings of $108 million, down from $144 million in the second quarter and down from $159 million for the same quarter a year ago.

The company’s difficulties have also hit investors hard. SGI was dropped from the New York Stock Exchange in November 2005 when its stock dipped below the minimum $1 per share. On the day of its Chapter 11 announcement, SGI stock bottomed out at less than six cents a share.

Also of concern is whether SGI can maintain its research and development as it tries to emerge from bankruptcy. Ryan insists the company’s R&D is progressing routinely.

SGI’s series of mishapsSilicon Graphics Inc. was at the top of the high-end computing world in the 1990s, holding lucrative government contracts and consulting on major Hollywood projects such as “Jurassic Park.”

But over the years, SGI found some of its key technologies lagging behind the industry.

  • SGI shunned MIPS Technologies’ processors in favor of Intel’s 64-bit Itanium architecture in the mid-1990s.

  • In 1999, Microsoft dropped support of SGI’s OpenGL graphics application in Windows 2000.

  • SGI’s graphics application program interface has fallen out of favor in consumer applications such as video games.
  • — Wade-Hahn Chan

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