News Analysis: Silicon Graphics hopes to burn glitch at the stake
Vendor aims to put troubled times behind it by focusing on getting product to market
When a manufacturer embarks on a worldwide restructuring to get its business back on track, you can normally expect the head honcho to say something bullish about how everything will change once it has got over this temporary glitch.
Take Silicon Graphics (SGI) for instance. Last week it shed chief financial officer Stanley Meresham and senior vice president Michael Ramsay as part of a wider reorganisation aimed at improving its track record on getting product to the market.
According to SGI CEO Ed McCracken, a different, better SGI will result after the troubled workstation manufacturer nearly completes its sometimes painful product transition.
?We?ve had some issues with product transition,? said McCracken. ?About 80 per cent of what we?re shipping is new. But I think we?re coming out the other end. I would expect quarterly growth to be much better than it has been.
?The transition issues we experienced getting new products out the door exposed the need to concentrate engineering and manufacturing in a single organisation. By bringing those operations together we?ll be able to bring out new products in a timely manner.?
Officially Meresham and Ramsay are leaving to ?pursue outside opportunities?, although Silicon Valley sources suggest their departures owe more to the need to overhaul a management team that was attracting criticism from Wall Street.
?Is this a reorganisation or higher management not getting along with McCracken and the company?s strategies?? asked one industry commentator.
Ramsay was the driving force behind SGI?s entertainment business, which accounts for 20 per cent of turnover. But one investor claimed the unit was a distraction from the manufacturer?s core business. ?It?s encouraging to see Ramsay go,? one investor said. ?He was the centre of the hollow hype ride of the past few years.?
The departures are the latest twist in the tale of SGI, a manufacturer which could do no wrong in the early 1990s. But SGI?s stock has been in the doldrums since it reported a poor third quarter, ended 31 March. Although it made a profit of $10.5 million, ending a run of three loss-making quarters, this was substantially down on the $53 million profit reported for the same time last year.
SGI?s performance internationally has been weaker than anticipated with Germany, France and Japan causing particular concern. Europe remains a key market for SGI, although it has been sluggish for the past two quarters. In the US, SGI is reporting revenue growth of 27 per cent year on year; in Europe, the figure falls to four per cent.
In Japan, SGI has found that its potential customers have been less receptive to its products and less likely to buy. This, combined with reduced government spending and currency valuation issues caused by the strength of the dollar, has caused SGI to look closely at its future efforts in Japan.
The product transition issues of moving users to SGI?s O-series product line ? O2, Octane, Origin 200, Origin 2000 and Onyx 2 ? has been hindered by various factors during the past six months. For example, the Octane desktop system?s delivery slipped late in the quarter due to issues with some of its components. But the company is now confident that all five O-products are ready to ship in volume.
The O2 desktop workstation is said to be SGI?s fastest selling product, partly because of an aggressive pricing strategy. A Q2 sales target of 20,000 units was easily met and shipments increased over 40 per cent between Q2 and Q3.
The introduction of O2 has led to a change in strategy. The more competitive and cluttered nature of the desktop workstation market means SGI is competing to take market share away from rivals by focusing on price/performance. The sector is also seeing an increasing presence for NT, an operating system that SGI has no immediate plans to support.
?Our systems support Unix and it?s the best operating system for people who care about performance,? said McCracken. But he left himself a get-out clause, saying: ?We?re not religious about Unix. If NT can provide the performance customers need, we?ll probably integrate it into our product lines.?
The Octane Desktop System workstation was introduced in February. In the last week of Q1, 1,150 Octanes were shipped to customers. In Q2, SGI expects the Octane to produce increased momentum in the workstation market and hopes that the adverse reaction caused by shipment delays will fade.
According to IDC, the overall workstation market grew 12 per cent in 1995. SGI is quick to point out that for the same period, its workstation revenues grew 34 per cent allowing it to claim third place in the market rankings after Sun and Hewlett Packard. In 1996, when growth slowed down, SGI was the only Unix workstation supplier to increase its revenues.
SGI?s expectations for 1997 are high. It hopes to tap into internet opportunities, predicting that while the departmental Web server market is likely to be dominated by the high-end PC suppliers, there will be a greater demand for enterprise workstation servers as organisations introduce thin clients. It also expects to benefit from its experience in the fields of 3D graphics and VRML as the need for richer media and data types is fuelled by internet development.
Only time will tell whether SGI has made the right move.