HPE Gobbles SGI for Larger Slice of $11B HPC Pie

By Tiffany Trader

August 11, 2016

Hewlett Packard Enterprise (HPE) announced today that it will acquire rival HPC server maker SGI for $7.75 per share, or about $275 million, inclusive of cash and debt. The deal ends the seven-year reprieve that kept the SGI banner flying after Rackable Systems purchased the bankrupt Silicon Graphics Inc. for $25 million in 2009 and assumed the SGI brand.

Bringing SGI into its fold bolsters HPE’s high-performance computing and data analytics capabilities and expands its position across the growing commercial HPC market and into high-end supercomputing as well. Per analyst firm IDC’s latest figures, the HPC market is at $11 billion and set to grow at an estimated 6-8 percent CAGR over the next three years. The data analytics segment, which is very much in play here, is said to be growing at over twice that rate. “Big data combined with HPC is creating new solutions, adding many new users/buyers to the HPC space,” stated IDC in its June HPC market update.

A joint announcement from HPE and SGI focused on how this explosion in data is driving increased adoption of high-performance computing and advanced analytics technologies in government and commercial sectors. HPC systems are critical for advancing such fields as weather forecasting, life sciences, and increasingly for cybersecurity and fraud detection, said HPE.

“Once the domain of elite academic institutions and government research facilities, high-performance computing (HPC) – the use of ‘super’ computers and parallel processing techniques for solving complex computational problems – is rapidly making its way into the enterprise, disrupting industries and accelerating innovation everywhere. That’s because businesses today are recognizing the big potential in the seas of their corporate data,” Antonio Neri, executive vice president and general manager, HP Enterprise Group, shared in a blog post.

He continued: “Organizations large and small are adopting HPC and big data analytics to derive deeper, more contextual insights about their business, customers and prospects, and compete in the age of big data. These businesses see revenue opportunity in the explosion of data being generated from new sources, like the proliferation of mobile devices, the Internet of Things, the ever-expanding volumes of machine-generated data, and the increase of human data in the form of social media and video.”

SGI CEO Jorge Titinger also emphasized the benefits of the union for data-driven organizations. “Our HPC and high performance data technologies and analytic capabilities, based on a 30+ year legacy of innovation, complement HPE’s industry-leading enterprise solutions. This combination addresses today’s complex business problems that require applying data analytics and tools to securely process vast amounts of data,” he said. “The computing power that our solutions deliver can interpret this data to give customers quicker and more actionable insights. Together, HPE and SGI will offer one of the most comprehensive suites of solutions in the industry, which can be brought to market more effectively through HPE’s global reach.”

SGI makes server, storage and software products, but it’s the UV in-memory computing line that has lately been the coveted star of the company’s portfolio. In February, SGI signed an OEM agreement with HPE for its UV 300H technology, a version of the SGI UV 300 supercomputer that is purpose-built for SAP HANA. As noted by EnterpriseTech Managing Editor Doug Black, the 8-socket server “filled the gap between its HPE ProLiant DL580 Gen9 Server, with 4-socket scalability at the low end, and the HPE Integrity Superdome X server that scales up to 16 sockets and 24 TB of memory at the high end.”

Notably Dell and Cisco are both resellers for the entire SGI UV 300H line, which scales as a single node system from 4-32 sockets in four socket increments. Just how the SGI sale will affect these arrangements remains to be seen, but it’s hard to imagine Dell as a reseller for HPE.

In the high-end supercomputing segment (systems above $500k per IDC), HPE was the top earner among HPC server vendors in 2015: taking in $1.23 billion in revenue out of a total $3.28 billion. Cray came in second ($583 million) and then Lenovo ($391 million). SGI’s share was $88 million.

IDC 2015 Revenue Share by Vendor - supercomputing

SGI, now located in Milpitas, Calif., after selling its storied Silicon Valley headquarters to Google in 2006, brought in $533 million total revenue in FY16 and $521 million in FY15. Its GAAP net loss for 2016 was $11 million, or $(0.31) per share compared with a net loss of $39 million, or $(1.13) per share in 2015. The company has approximately 1,100 employees.

The deal’s $7.75 per share price represents a 30 percent premium over today’s closing price of $5.98. In after hours trading, shares of SGI have gone up by nearly 30 percent to $7.70. HPE’s stock closed today at $21.78, falling just .05 percent in after hours trading to $21.77.

The transaction is on track to close in the first quarter of HPE’s fiscal year 2017, after which SGI will become part of the HPE Data Center Infrastructure group, led by Alain Andreoli. HPE expects the impact on earnings to be neutral in the first full year after close of sale and accretive thereafter.

The SGI purchase is the latest in a series of big changes for the HP brand. Last September, Hewlett-Packard officially split the PC and printer business from its enterprise (and HPC) activities, creating Hewlett-Packard Enterprise (HPE) to focus on servers, storage, networking, security and corporate services. In May, HPE went through another split when it merged its enterprise services unit with CSC to create a $26 billion “pure-play” IT services organization.

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