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Silicon Graphics Cutting 400 Jobs

The computer hardware company is struggling to turn a profit as it loses sales to Linux-based systems.

May 23, 2003|P.J. Huffstutter | Times Staff Writer

Computer hardware manufacturer Silicon Graphics Inc. cut nearly 10% of its staff Thursday to reduce costs as it struggles to find its place in an increasingly Linux-oriented world.

The layoffs underscore how deep the troubles are for the onetime Silicon Valley powerhouse -- and how dim its future appears. Its sales, which peaked at nearly $3.7 billion in fiscal 1997, fell sharply to $1.3 billion last year.

SGI has produced technology that helped design spacecraft, gave birth to a new breed of big-screen special effects and allowed the military to test war scenarios before the recent invasion of Iraq. But its products are increasingly unable to compete against rival computer systems based on the free Linux operating system.

In the past, SGI bestsellers have been expensive stand-alone units loaded with proprietary software, and many of the units rival supercomputers in their power. These days, however, any number of off-the-shelf PCs armed with Linux software can do the same jobs.

To conserve its financial resources, the Mountain View, Calif., company has sold nearly all its vast real estate holdings, leasing back only a few buildings nestled amid stately pine trees.

Its staff has been slashed by more than half in the last five years. After the latest layoffs, which eliminated 400 jobs, the company is left with a workforce of about 4,000.

"Our intent is to bring expenses in line with revenues," Chief Executive Bob Bishop said in a statement. "We are in the process of taking other specific actions to increase revenue and lower costs."

Most of the job cuts were in the company's marketing and administration teams, officials said. About 285 of the positions were in the U.S., including 168 at SGI's headquarters.

Company officials said the layoffs, which employees were told of Thursday, would reduce expenses by about $10 million a quarter, starting in the company's 2004 fiscal year, which begins July 1. SGI plans to record a charge of about $15 million to $20 million in the current quarter to pay for employee severance and other related charges.

On top of all that, executives are nervously facing a September 2004 repayment deadline for a $230-million bond. SGI cannot pay it back with its $167 million in cash on hand.

For months, the company has been pleading with bondholders to roll over their holdings into a new bond program that would mature in 2009. So far, bondholders representing 49% of the debt have made the switch. SGI needs bondholders controlling 90% or more of the debt to agree.

"Clearly, they are facing some challenges," said Justin Udelhofen, an associate analyst with research firm Needham & Co., which doesn't conduct business with SGI or own any of its shares. "They expected their sales to stabilize, but their new Linux line [of servers] hasn't taken off enough to offset the decline in sales in their other lines."

This year, the company launched its Altix 3000 line of high-end Linux servers. Designed around a powerful 64-bit Intel processor, the servers' ability to share memory across a cluster of machines will be a compelling sell, SGI executives hope.

Still unclear is whether SGI's core customers will pay a premium for Altix servers or go with mass-marketed PCs made by rivals Dell Computer Corp. and Hewlett-Packard Co. that are less powerful but cheaper.

"It's difficult, because they're trying to create a new paradigm of computing," Udelhofen said. "But how do you sell something when the environment for corporate buying is so poor?"

Although SGI's customers clearly demand computing muscle, many are wrestling with dwindling budgets. Its government and defense contracts make up the biggest chunk of its revenue, at 35%. Science and manufacturing clients contribute 20% each, and the energy and entertainment industries account for 10% each.

Analysts at Needham & Co. said in a recent report that "even if it proves successful, the Altix is unlikely to contribute materially to SGI's revenue until fiscal 2004 at the earliest."

On Thursday, the company's stock fell 4 cents to $1.10 on the New York Stock Exchange.

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