The decision by financially-troubled Silicon Graphics Inc. to file for bankruptcy protection in the U.S. is “great news,” says the head of its Canadian subsidiary.
However, one of the high performance computer manufacturer’s Canadian partners isn’t so sure.
“Right now I have some concerns,” said Tony Wong, manager of corporate IT at MemX Corp. of Calgary, a networking systems integrator with annual revenues of about $750,000 that became an SGI partner only six months ago. “It definitely affects business because clients are asking questions.”
He had a “gut feeling” recently that SGI, which makes Unix and Linux workstations, servers and storage systems aimed at the manufacturing, health and media industries, was in trouble.
But at a meeting with partners at the manufacturer’s California headquarters in February, CEO Dennis McKenna said “they were getting things taken care of.”
The announcement this week that SGI would file voluntarily for Chapter 11 protection was “a surprise to me,” said Wong. In fact, he heard the news from his customers.
“I don’t know what’s going on long term for them,” he said.
However, SGI Canada president Martin Pinard is optimistic. “This I believe is great news for SGI,” he said of the bankruptcy filing, because it is part of a reorganization plan agreed to by all of the company’s senior secured lenders and holders of a significant amount of its secured debt.
Rather than seek court protection and then negotiate with debtholders, Pinard said, SGI first nailed down a deal that will – if approved by the court – see some $253 million in debt converted to equity. At the same time some holders of senior secured notes will invest US$70 million in the company for ongoing financing.
New common stock will be issued, wiping out the existing SGI shares and unsecured debt.
Caught, as many Unix vendors were, by the shift of buyers to x86-based computing, SGI has been in red ink for several years. To combat that it has shifted emphasis from its Irix Unix to promoting sales of its hardware with Red Hat or Novell SuSe Linux, but sales are far from its glory years in the 1990s.
According to Alan Freedman of IDC Canada, at one point SGI’s Unix server sales put it among the top four vendors in this country. Now it accounts for about a half a per cent of the market on that platform, and about three per cent of Linux server sales.
SGI lists about a dozen reseller partners on its Web site, although a spokesman for one of the biggest, St. John’s, Nfld.-based xWave, said it hasn’t made any SGI sales in a year and was uncertain whether it is still a partner.
Paul Hellerup, comptroller of Cimetrix Solutions of Oshawa, Ont., estimated his company has sold only “one or two” SGI products a year for the past three years.
Scott Wagner, president of Calgary-based Zentra Computer Technologies, which has several offices across the country, said SGI cut his firm off in December for poor sales. However, Wagner said that was because SGI’s sales force was selling product below the reseller’s cost so his staff had little incentive to push its storage units.
Things got so bad SGI’s stock was delisted on the New York Stock Exchange last November because the price had fallen below the NYSE’s minimum standard. Its annual shareholders meeting has been suspended until further notice.
The company’s latest preliminary quarterly financial results for the period ending March 31 showed a net loss of US$43 million on revenues of US$108 million. The previous quarter it had revenues of US$144 million.
It still has cash or cash equivalents of US$55 million.
To shake up the company, in January McKenna was brought in from SCP Global Technologies, a supplier of semiconductor capital equipment which he had returned to profitability. Three months later he cut SGI’s workforce by 12 per cent (including two of the 50-person staff in Canada) and hired new chief financial and chief operating officers.
He promised to continue a previously planned $150 million cost reduction program, consolidate SGI’s server and visualization platforms, and pursue new enterprise markets.
It apparently wasn’t enough, although Pinard said part of the renegotiation plan called on dealing with the debt.
SGI is “a well-respected niche player,” said IDC Canada’s Freedman, that tried and failed to diversify several years ago. Its move to Linux makes sense, he said, because many of the applications SGI’s customers are using are being ported to the open source operating system.
“We’ll have to see if it (the rescue plan) is too little, too late,” he said. Even their potential market is not tremendous. They have to concentrate on those workloads where they’re strongest.”
Martin Pinard is certain SGI is turning a corner. “Our employees are pretty happy about the execution of the plan,” he said, “and our customers are pleased to see light at the end of the tunnel and that the company will come out of it debt free.”
“The big majority of partners I talked to (on Monday) understand the process and didn’t have an issue. After talking with me the one who had concerns congratulated the company for facing the issue head to head.”
For Tony Wong of MemX, whose job it is to help chose the VAR’s partners, the survival of SGI means a lot. “We don’t do a lot of enterprise computing,” he said, “so we’re looking to break into that market. We thought SGI would be a good fit.”
“We had some clients interested” in buying, he added. “This definitely does not help.”