By Charles King, Pund-IT, Inc. Auguat 17, 2016
When I first began working in Silicon Valley as a freelance writer, SGI was my first client, and a very high flying vendor at the time. That was mainly due to the use of company’s high-end graphics solutions in the entertainment industry. SGI work stations and systems were used to create the computer generated imagery (CGI) effects in dozens of films, including classics like Jurassic Park, Jerry Maguire and Men in Black. In fact, from 1995 to 2002 all of the films nominated for the Academy Award in visual effects utilized SGI systems.
But those high profile successes masked fundamental problems in the company’s business. Under CEO Ed McCracken, the company’s revenues grew massively (from $5.4M in 1984 to $3.7B in 1997), but SGI was losing the innovation race against increasingly powerful (and far cheaper) Intel-based graphics workstations and PCs.
The company’s decline increased momentum after McCracken was replaced by Rick Beluzzo, an HP EVP, who rebranded the company as “Silicon Graphics,” cut funding for SGI’s homegrown IRIS OS and MIPS processors, embraced Intel’s new Itanium processors and tried to compete head-to-head with Dell and other Windows NT-based workstation makers. Interestingly, Beluzzo was also instrumental in HP’s decision to abandon its own PA-RISC chips in favor of Itanium. By the time he left SGI for a position at Microsoft, SGI was in a tailspin.
To save cash, the company drastically reduced headcount, cut expenses and leased its spiffy, new, space age headquarters to Google which bought the property in 2006, the year after SGI was delisted from the NYSE. In 2009, SGI declared bankruptcy and agreed to sell most of its assets to Rackable Systems, which rebranded itself as SGI.
Since then the company focused on a range of Intel Xeon-based systems solutions, achieving regular success in high-end HPC and supercomputing installations. Then last week, HPE announced an agreement to purchase SGI for $275M, a roughly 30% premium on the company’s current share value.
Buying-up in HPC
So why exactly is HPE pursuing this deal? It certainly isn’t for the sake of revenues or profits. In its current fiscal year, SGI made just over $500M with about 80% coming from system sales and services driving the rest, but it was only marginally in the black.
That said, the HPE’s sizable salesforce should help drive new revenues. Plus, SGI’s HPC services business delivers healthy margins and is complementary to the systems-focused services business HPE plans to retain. Moreover, SGI owns proprietary technologies that are complementary to HPE’s HPC and supercomputing solutions (especially the NUMALink interconnect used in the SGI UV systems).
Those technologies have contributed to SGI’s success in high profile HPC wins, like those included in the twice-yearly Top500.org lists of the world’s best-performing supercomputers, a point which underscores HPE’s interest. That might seem a bit counterintuitive since HPE’s servers are actually better represented on Top500.org than any other vendor. In the most recent (June 2016) list, HPE systems were utilized in 127 of the 500 installations included.
But while the company ranked highly in total numbers, it left something to be desired in terms of actual performance. The top HPE-based installations in June 2016 were ranked #47 and #48 respectively, and the company had just three systems in the top 100. There were 23 HPE-based installations in the top 200 but the vast majority of the company’s systems were relegated to the list’s bottom half.
In contrast, SGI regularly “punches above its weight” on the Top500.org list. In June 2016, just 25 of the company’s installations were included, but its top performing system ranked #11. Moreover, SGI had two systems in the top 20, five in the top 50, 9 in the top 100 and 18 in the top 200. By completing the deal, HPE’s HPC and supercomputing rep should gain significantly, and the company claims buying SGI will allow it to pursue higher profile, higher value deals with private and public sector organizations, including Federal agencies.
How likely is this scenario? That’s hard to say, frankly. Supercomputing has never been a great way for vendors to make a living—witness the continuing financial challenges of SGI, Cray and other HPC specialists despite their technical achievements. Market leadership in the space also requires significant, continuing investment, and people with the experience and expertise to evolve new and next generation tools.
HPE’s history suggests that its approach to HPC has focused more on developing “good enough” solutions than delivering leading edge technologies. Infusing its HPC organization with SGI talent could and probably should allow HPE to see a significant boost of market success. But maintaining or increasing that momentum will require the company to dedicate more financial and human capital to HPC than it has in the past.
That’s a pretty high bar in and of itself. But it also assumes that HPE will successfully retain the vast majority of SGI’s product development and research team members. Since it’s likely that many of those individuals are already being courted by other HPC players and competitors, how well and successfully HPE manages the integration process after the acquisition closes will be crucial.
Overall, this deal marks a sad, if predictable end to what was once one of the IT industry’s best and most storied vendors. The purchase of SGI makes eminent sense financially, tactically and strategically for HPE. But whether the deal will result in a substantially brighter future for SGI’s current employees and the company’s myriad innovations is anything but certain.
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