Breaking News--SGI Comes Out of Bankruptcy, Says It is Lean and Mean

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SGI Comes Out of Bankruptcy, Says It is Lean and Mean

Published: October 18, 2006

by Timothy Prickett Morgan

Linux server maker Silicon Graphics emerged from chapter 11 bankruptcy protection yesterday. Having shed $240 million dollars in long-term debt as the result of its bankruptcy settlement and shut down some underperforming product lines, SGI's top brass says that it the company is now lean and mean--and ready to take its Altix servers and its NUMAflex clustering technology to more of the IT masses. This could be SGI's best chance in a number of years to get its business in gear.

SGI filed for bankruptcy protection in May. The company has not been profitable on an annual basis since 1997, and was delisted from the New York Stock Exchange in November 2005. SGI has been the victim of its own strategies in the late 1990s and early 2000s, where it tried to enter new markets such as Windows workstations and commercial Unix servers without any success. By the time IT sales started to tank in 2000, SGI was left with little choice but to hunker down and try to sell its MIPS RISC-based Irix servers and build out its Linux-Itanium Altix server line as quickly as it could. While the Altix machines were technically interesting and had some differentiating characteristics, such as the large shared memory spaces they allow Linux applications to work in, Altix sales were not enough to offset declines in MIPS/Irix machines. Perhaps more significantly, SGI's Altix machines were high-end boxes with big price tags, and they had a hard time competing against Xeon and Opteron clusters with InfiniBand, Myrinet, or Quadrics interconnection networks. By the time SGI was readying a Xeon-based product line, the Altix XEs, it was already heading toward bankruptcy. In fact, these machines were announced a month after the bankruptcy protection went into effect.

When the company went into bankruptcy in May, Dennis McKenna, who was named SGI's chief executive officer in February, immediately cut back on employees, research and development, and facilities to cut $100 million in annual costs from the SGI books. He vowed at that time to remove another $50 million in costs from the company, and part of that came from shutting down the MIPS/Irix server line and specialized visualization products SGI had created to try to carve a niche for itself. A month ago, when the courts approved its bankruptcy reorganization plan, SGI said that it had acquired an $85 million term loan from Morgan Stanley Senior Funding and a $30 million line of credit from General Electric Capital. These funds were used to pay off its debtor-in-possession financing, pay off other creditors according to the plan, and provide working capital for SGI's operations going forward. This is the $115 million in short-term financing that SGI currently has on its books. When the company went into bankruptcy in May, it had more than $400 million in debts, with $240 million of that being long-term debts that limited the company's maneuverability. As it exits bankruptcy, it has a Xeon server line, a revamped Itanium product line that uses Intel's latest dual-core "Montecito" Itanium 9000 series processors, and a matching set of storage arrays and clustered file systems.

So what is SGI going to do different now that it hasn't already been trying to do since the Altix line was launched in January 2003? Go after a bigger slice of the server and storage pie, says Dave Parry, senior vice president and product general manager at SGI.

Parry says that the new or updated products in the Altix 4700 high-end and Altix 450 midrange Itanium servers line, the Altix XE Xeon server line, and the InfiniteStorage line of NAS and SAN array lines represent 75 percent of what SGI is peddling today. New products are part of the plan, and SGI's product line arguably looks better than it has in years. The Itanium chip has got some traction and can compete on price and performance with any Opteron or RISC alternative, and Linux is a no-brainer in the high performance market and is accepted in commercial data centers these days.

But so is attacking a much larger market. By SGI's reckoning, its products can be sold into a worldwide server opportunity of about $53 billion a year and a storage opportunity of about $27 billion a year. If you break that down by industry, SGI figures that defense contractors and the governments who buy integrated systems spend about $3.7 billion on servers and storage, with academic labs and other scientific research institutions buying another $7.6 billion in gear. Companies engaged in engineering analysis--be they manufacturers, oil and gas exploration companies, or engineering firms--consume about $13.1 billion in storage and servers. These are the three markets where SGI has been focused for a decade, and they represent about 90 percent of SGI's current revenues. This is not where the growth will come from.

But enterprise data management--the convergence of supercomputing, data warehousing, and data analytics--is, if SGI plays its cards right, where the growth will come from. This EDM space, where companies are extracting and loading huge volumes of data, chewing through massive databases, and trying to extract knowledge from mountains of information, only represents 10 percent of SGI's sales today, but it represents about $60 billion of the worldwide addressable market that the company has identified where it can sell Altix machines and InfiniteStorage arrays. Up until now, SGI has not been chasing three quarters of the market where it could play, and play with some technological advantages.

None of these four markets segments--defense, science, engineering analysis, and enterprise data management--are growing all that fast, according to Parry; they're averaging between 3 and 7 percent annually, he says. "The interesting thing, however, and particularly in the EDM space, is the growth rate of Linux," explains Parry. "Linux is growing in the neighborhood of 60 percent annually in the EDM space, and it is growing at the expense of Unix"--just as it did, with disastrous effects on SGI's Irix parallel supercomputer business, in the HPC market starting in the late 1990s. SGI is not going to repeat that mistake again.

Parry says that SGI's play in the EDM space is predicated on the confluence of three factors: the move to Linux among enterprises; the move to high-end "capability machines" that have big memories, high bandwidth, and low latencies; and the increasing demands of moving around and processing large data sets. In the industry at large, aggregate storage capacity is doubling every nine to 12 months. This is a lot of data to cope with.

SGI's fate will now come down to execution. It has more than 1,600 employees, with 800 of them in customer facing roles and another 300 of them engineering systems. It has more than 6,000 customers and sales of over $500 million a year. But it is going to have to fight like crazy to win every sale--just like all of the other server makers.

"We believe that the Altix is better in a number of ways to an HP Superdome or an IBM System p," says Parry. "The Altix brings to bear performance characteristics, such as a very high bandwidth architecture, that serve data analytics and high performance databases very well."

SGI has certified Oracle 10g, IBM DB2, and a few other databases on the Altix line, and has even been certified to run SAP's entire suite of mySAP applications. It is a healthy re-start.