HPCwire: A Moment of Truth for SGI

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December 15, 2008

A Moment of Truth for SGI

Vendors in the HPC market might fare better in the recession than other IT sectors, but they're not immune to economic gravity. SGI's recent shedding of 15 percent of its workforce (225 employees) is one data point worth considering.

SGI's downsizing is certainly not unexpected. After all, the company has been bleeding money since it resurrected itself from bankruptcy in 2006. Apparently, the credit crunch and struggling customers forced the issue. According to a prepared statement from SGI CEO Robert "Bo" Ewald, "[T]he impact of the credit crisis and weakened global economy has caused SGI, along with our customers and other companies in our industry, to reduce expense levels to reflect the current business environment."

Less than a week before the announcement of the layoffs, NASDAQ issued a delisting notification against SGI because the company's market cap fell below $35 million. To avoid almost certain delisting, the stock will have to push the market cap back above $35 million for at least 10 consecutive days prior to Jan 2. As of December 15 the stock is trading at $3.35, yielding a market cap of 38.88 million.

The cutbacks at SGI probably should have taken place months, if not years, ago. In the last fiscal quarter (Q1 FY09), the company reported a net loss of $33.7 million. Compare that to $36.2 million in the same quarter of 2007 and $32.1 million in 2006. In the remaining three quarters of a typical year, the company is bleeding another $60 or $70 million. That sure has the looks of a structural deficit to me (As a California taxpayer, I have a pretty good notion of structural deficits.)

So will shedding 225 people do the trick? Not even close. Let's assume the average annual salary of the workers SGI laid off was $100,000. Probably high, but the SGI press release noted that "several executive and senior-level positions" were being cut loose. If we add a generous 50 percent on the base salary for a burdened salary of $150,000, that works out to a savings of only $33.7 million per year. That would only account for the deficits in the first quarter of the fiscal year, assuming of course laid-off workers weren't contributing at all to the bottom line.

To break even SGI needs to find a way to make up for the remaining losses in Q2 through Q4. The company outlined a few other cost-cutting measures it would pursue, but they were stated rather vaguely:

Adapt its business plan to today's economic reality.
Eliminate costs that are not aligned with the refined business plan.
Implement more efficient and streamlined international sales and service coverage via strong channel partnerships, as it has already done in Japan and Korea.

At this point there is no talk of letting go of any of the company's wide array of products, which encompasses Itanium-based servers, x86-based servers, clusters and blades, as well as a whole gamut of storage hardware and software offerings. At the same time, SGI stated its intentions to continue investing in its server products, visualization software offerings and ISLE (Industrial Strength Linux Environment) technology. That seems like a lot of product and R&D to support for company with a market cap below $40 million.

But SGI has always been a vendor of big intentions. At the recent SC08 show in Austin, it was showing off its futuristic "Molecule" supercomputer, made up of thousands of Intel Atom cores in a single rack. Adapting low-power chips intended for mobile devices for HPC machines is surely one of the most interesting models for supercomputing, but for a company that is trying to navigate its way back to profitability, it seems like a frivolous way to spend money.

With the global economy in free fall, 2009 will be a real test for SGI. The good news is that a tech-friendly administration and Congress will arrive in Washington next month and the new policymakers are apparently committed to a humongous (up to $1 trillion) government spending spree. If struggling vendors like SGI manage to tap into just a small piece of that largesse, they could survive the worst recession in over 30 years.

Posted by Michael Feldman - December 15 @ 7:18PM

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Michael Feldman

Michael Feldman is the editor of HPCwire.

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