ENGINEERING

By Steve Fisher, Editor In Chief -- SGI, a leader in high-performance computing, complex data management and visualization products, solutions and services, today announced today announced results for its first fiscal quarter, which ended September 28, 2001. Revenue for the first quarter was $379 million. The operating loss for the first quarter was $2 million, excluding additional charges of $44 million related to restructuring and other special charges. Overall, the company posted a net loss of $69 million or $0.36 per share, including interest and other non-operating expenses. This compares with a net loss of $232 million or $1.20 per share for the quarter ended June 30, 2001. Although the company missed Wall Street’s estimates by $0.03 and did indeed report a fairly significant loss, the news surely will be viewed as at least somewhat positive since Chapter 11 rumors had been heard here and there and the announcement definitely could have been worse. Chairman and CEO Bob Bishop said, “This was a decent quarter for SGI. We are making progress toward our goal of breaking even in the December quarter. Operating expenses were better than expected, backlog improved and we effectively maintained our unrestricted cash balance from the prior quarter.” Once a heavyweight in high performance computing, the company has been fighting at a much lower weight for quite some time. Fly-weight? Super-fly-weight? Things change though and with some positive news over the next few quarters SGI could be working its way toward a shot at the heavyweight title. In addition to the relatively positive first quarter financials SGI also announced it had signed an agreement with Microsoft Corporation that involves a patent cross-license and the transfer of certain additional non-core intellectual property rights to Microsoft. The agreement reportedly generated $62.5 million in revenue for SGI and closed in September 2001. The terms of the agreement remained nebulous however. How this alliance will be viewed by the HPC industry is an interesting question as Microsoft is still often referred to as “The Evil Empire” by more than a few. Will potential customers find the alliance off-putting? Time will tell. Another nebulous agreement is the financial tie-up with NEC Japan that was announced last month. Very little was said of this on the SGI conference call. “As we announced in September we have entered into a letter of intent with NEC of Japan to deepen the strategic ties with our respective businesses there,” Bishop said. “Our next step will be to finalize these negotiations which may include an investment by NEC into our Japanese operations.” SGI clearly has a lot going on at the moment. They have reportedly completed the restructuring activity that we announced in July and have entered the new quarter with a significantly reduced operating expense run rate. They recently announced the new Origin 300 NUMAflex-based modular servers and TP 900. They have augmented their executive team. There’s the Microsoft deal and the proposed NEC deal as well. There also is some activity in one of SGI’s larger yet largely overlooked sectors…Government, particularly defense and intelligence. “We are already seeing early indications of positive bookings in the second quarter. This gives us optimism that our government business will increase above the current 20% of revenues in the near future,” Bishop stated. “To strengthen our position here we are sponsoring a defense summit in Crystal City Virginia on October 30th that will include all US defense and security agencies.” It will definitely be interesting to see what comes of that defense summit. Can SGI turn its business around and return to profitability? Who knows. With all the action they have going on though, things are at the very least looking better than they have for the company in a very long time. Consider the following statement by CFO Jeff Zellner as well. I found it encouraging and an indication that SGI has its collective head in the right place and is may be ready for the challenges that the future holds. "We are determined to achieve profitability. As we announced in July, we have executed an additional restructuring which will allow us to enter the quarter with approximately $165 million in quarterly operating expenses. This will allow us to break-even at the operating profit level in Q2, if we achieve our previously announced revenue target of $375 million and gross margins of 44%. Given the current environment, these are aggressive goals and we may have limited flexibility to adjust operating expenses within the quarter to compensate for changes in our assumptions. Taken as a whole, however, we believe our position has improved and profitability is within reach." Of course the bottom line is the stock price. SGI closed at $0.56 this afternoon which was up substantially from the 52 week low of $0.31. If you're a shareholder, watch your stock tickers tomorrow morning. It could be a wild ride.