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SGI to Cut 600 Jobs, Move Out of Office

August 28, 2003|P.J. Huffstutter | Times Staff Writer

Wounded by a lingering economic downturn and competition from lower-cost rivals, computer maker Silicon Graphics Inc. said Wednesday that it would slash 600 jobs and vacate its expensive corporate headquarters in its latest attempt to restructure.

Combined with 400 layoffs announced in May, the cuts will amount to a 23% reduction in SGI's worldwide workforce, to 3,400. At its headquarters in Mountain View, Calif., employment will have dropped from 1,400 this spring to 760 once the latest layoffs take effect.

SGI executives said the layoffs would reduce expenses sufficiently to get the company out of the red.

"They're good cuts," said Justin Udelhofen, an associate analyst with research firm Needham & Co. "They're necessary because the company's sales have yet to come back in line with their expenses."

SGI was once a leader in high-performance computing. Its machines helped design spacecraft, gave birth to a new breed of Hollywood special effects and allowed the military to test war scenarios before the recent invasion of Iraq. But the company struggled to maintain a niche business as ordinary desktop computers became more powerful and less expensive.

SGI has reported losses in 20 of the last 24 quarters. Its sales, which peaked at nearly $3.7 billion in its 1997 fiscal year, have fallen steadily, to $961.7 million in its 2003 fiscal year, which ended June 27.

In a sign of how desperately it needs revenue, SGI said its remaining headquarters staff would leave the company's 500,000-square-foot office. SGI will sublet the office to search engine firm Google Inc., a Silicon Valley darling, and relocate to a nearby complex that's about half as big.

The company said it expected to record a charge of $20 million in the current quarter to cover severance fees and other expenses associated with the layoffs.

"It's been a difficult time, but we're confident about what the future holds," said Greg Estes, SGI's vice president of marketing. "This is not just a computer company. We make computers that change the world."

When SGI went public in 1986, it was considered a hot young company, essentially the Google of its day. Its machines were loaded with proprietary software, and some were so powerful that they rivaled supercomputers.

But SGI has found it increasingly difficult to sell machines in a market filled with personal computers running systems based on the free Linux operating system.

SGI is hoping to boost its dwindling sales with its Altix 3000 line of high-end Linux server computers, which are designed around a powerful 64-bit processor from Intel Corp. SGI executives are gambling that the servers' ability to share memory across a cluster of machines will be a compelling sell to customers in military, scientific and Hollywood circles.

Wall Street analysts say it's unclear whether SGI's core customers will pay a premium for Altix servers or go with PC-based systems made by rivals IBM Corp., Dell Inc. and Hewlett-Packard Co. that are far cheaper.

In September 2004, SGI will face a deadline for repaying a $230-million bond. The company had only $140.8 million in cash on hand as of June 27.

SGI had offered bondholders the chance to roll their holdings into a new program that would mature in 2009. Bondholders representing 71% of the debt agreed to make the switch, but that was short of the 85% that SGI needed. The company rescinded its offer this month.

To conserve its financial resources, SGI has sold nearly all its vast real estate holdings, leasing back only a few buildings nestled amid stately pine trees. One looming structure, its former North American sales offices, now houses the Computer History Museum.

In New York Stock Exchange trading Wednesday, SGI's stock price rose a penny to 97 cents a share. The stock has fallen 14% this year.

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