CEO Dennis McKenna Plans for SGI’s Comeback

By Michael Feldman

May 12, 2006

On Monday, SGI filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of New York. For industry watchers, the announcement came without surprise; SGI's fortunes have been declining for some time. The company has not recorded a profitable year since 1997. In their heyday in the 1990s, the company had 12,000 employees on a 26-acre SGI “campus” (now leased to Google) and were considered the premier maker of high-end graphics workstations and other high performance systems. In November of last year, SGI's stock was de-listed from the New York Stock Exchange after failing to maintain a minimum price of $1 a share for 30 consecutive days.

According to the bankruptcy filing, SGI listed its current assets at $369.4 million, while its liabilities were $664.3 million. In the proposed restructuring three of the major bondholders agreed to convert their $250 million debt into equity and loan SGI an additional $70 million to keep the company afloat. The company plans to emerge from bankruptcy within six months.

At the time of the filing, Dennis P. McKenna, the recently appointed, Chairman and CEO of SGI publicly stated that “we want to assure our customers, our employees and our communities that SGI is operating — business as usual.”

This week, HPCwire got an opportunity to speak with Dennis McKenna about the nature of SGI's difficulties and what he plans to do as the company reemerges from bankruptcy. He shares his views on SGI's missteps and offers a hopeful vision of the company's future.

McKenna says he came to SGI three months ago because he believed in the technology, the customers and the markets that the company has successfully served for so long. With some fundamental financial and operational re-engineering, he thinks SGI can continue to serve the IT community for the foreseeable future.

“Often times there's something wrong with the technology; the technical skill set is lacking,” says McKenna. “And you need to fix that. From a product or technical standpoint, that's a long process — usually a minimum of two years. SGI didn't have that problem. Its core competencies within its technical [domain] have always been there and still are there. It just needed to be focused and applied successfully relative to its go-to-market strategies. That's exactly what we're doing.”

Over the past several years, the company accumulated hundreds of millions in debt that weighed down the company. From McKenna's perspective, there were three major reasons for SGI's long-term decline:

(1) The company was slow to adopt new technologies in the marketplace.

(2) As a result of various acquisitions that it made, it lost it's core focus.

(3) The management team expended a lot of its effort dealing with the outcomes of (1) and (2).

After McKenna took control of the company in February, he instituted immediate changes to relieve some of the legacy financial burden, including reducing the workforce by 12 percent and implementing other cost-saving plans to lower debt interest, rent and leases. These cost reductions were estimated to save the company $100 million up front, and an additional 50 million by the end of this year. But it soon became apparent that the uncertainty created by SGI's acute financial situation needed to be addressed before any more damage was done.

“There was a recognition that the financial instability of the company was having a negative effect on the revenues,” explains McKenna. “That uncertainty, relative to our future, was dampening those opportunities and that had to get fixed. So as we looked at options in talking to both strategic and financial partners, this [Chapter 11 filing] ended up being the most viable option to re-engineer the financial piece of the puzzle.”

McKenna says that the reaction from their customers has been very supportive.

“I've been here almost a hundred days,” says McKenna. “Before this [bankruptcy] announcement even took place, when I talked to customers, they had concerns about the financial viability of the company. But the next sentence was: 'We want to see SGI be successful; we like the technology; we like doing business with you. But you have to go solve this problem.'

“The key point for the customers in this announcement is this gives us a level of certainty relative to SGI's future. This is a defined process that has an endpoint. And that endpoint defines that SGI's financial structure will be stable. We have confidence in the direction that the new management team has outlined for us. We've gotten our operational cost structures in alignment and we have defined a strategy to improve the top-line revenue numbers.”

As far as SGI's suppliers, McKenna says it's “business as usual.” The Chapter 11 legal process dictates that. They've got contractual agreements in place to insure that happens.

But for the company's shareholders, there's no safety net. Prior to this week, its stock was selling at around 32 cents per share. Now the shares are worthless.

“That's the most painful part,” admits McKenna, “knowing people who have invested in SGI — long time supporters. And it's not just people outside the company, it's our own employees.”

Under the pre-negotiated plan, the secured bondholders will own the majority of the shares. The management team and the employees will own a small piece of the company. McKenna says that another group of bondholders will come in and also own a sizeable piece of the company.

So what of SGI's future? Here, McKenna believes there's lots to be optimistic about. According to him, the overall plan is to leverage the core strengths of the company to reinvent itself. Specifically, he believes that the company's competency in dealing with large database applications can be applied to a wide variety of verticals. The exponential growth of complex datasets across government and industry is viewed as a ripe opportunity by SGI. For example, their newly released Altix 4700 platform is targeted specifically at the multi-terabyte database customer. But SGI intends to broaden this technology into other segments.

“We will be expanding our addressable market,” says McKenna. “So how are we going to do that? Within the existing marketplace, we have over 6000 customers. That's a huge asset. Those customers like doing business with SGI; they like our products. And we have huge domain knowledge.”

But he also sees the opportunity to do better within their current markets. McKenna admits they haven't done a good job with bundling solutions across their vertical segments or portraying their products in a way that differentiates them from their competition. So despite doing a good job with a large customer population, they haven't marketed that expertise very well.

“That's opportunity number one,” says McKenna, “just doing a better job in the markets that we serve today.”

The next area SGI intends to focus on is the enterprise. For SGI, whose customer base is largely government and scientific computing organizations, the enterprise represents a new marketplace.

“They're dealing with this challenge of complex data — accessing it, analyzing it and transforming it,” says McKenna. “This isn't just a transactional world anymore in the enterprise space. They've hit a wall with database software within their present environments. We've been able to demonstrate a very compelling solution set for specific applications within the enterprise. We are in preparation and launch of those activities and there will be more announcements coming in the next few months.”

The third piece of SGI's transformation will be new products. According to McKenna, currently they're addressing only 20 percent of the existing budget dollars of their customers. The new products will allow them to address 80 percent of those dollars. And the platform on which these new products will be based — x86 based clusters. McKenna says they will use Intel-based processors for their new product line. A formal announcement is expected in mid-June.

“That's the new business model of SGI going forward,” says McKenna. “And it's all converging here in the July time frame. SGI is on a road to recovery and we're feeling pretty optimistic about our chances. This is a financial re-engineering step that was necessary. Now we have all the requirements here to move forward.”

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