SGI Losses Tied To IBM Production Shortfall
(10/24/00, 6:12 p.m. ET) By Mark Hachman, TechWeb News
If IBM's foundry business is not a victim of its own success, then Silicon Graphics is.
SGI executives strongly hinted in an interview late Monday that IBM has bottlenecked SGI's production, confirming independent reports from other industry sources including a few SGI employees.
Although reports have recently indicated that some areas of the semiconductor market are softening, such as the components used in wireless handsets, IBM Corp. (stock: IBM) has long held a reputation as the crème de la crème of chip manufacturing. Cyrix Corp., Advanced Micro Devices Inc. (stock: AMD), and most recently Transmeta Corp. (stock: TMTA) have taken advantage of IBM's leading-edge process technology and patent portfolio.
"SGI can't just go to any foundry," said Danny Lam of analyst firm Fisher-Holstein Inc., Wilmington, Del. "IBM is the leading-edge of leading-edge foundries. "They're years ahead of anyone else."
Now, however, analysts and an IBM spokesperson said demand for the ceramic packages surrounding the chips themselves have been in even shorter supply, prompting IBM last week to announce a $5 billion plan to expand the company's wafer production and packaging operations. SGI's leading-edge ASICs consume a great deal of power, and require the flip-chip packaging IBM developed.
"They developed this flip-chip technology 30 years ago," said Jim Walker, a chip packaging analyst at GartnerGroup/Dataquest Inc., San Jose, Calif. "They understand it better than anyone else."
In an interview, Hal Covert, chief financial officer of SGI, Mountain View Calif., originally declined to name IBM as the source of SGI's production constraints.
However, Covert did say that the supplier had recently announced a $5 billion production expansion, and agreed that IBM had indeed done so. Independent sources had also named IBM as the supplier and a spokesman for IBM Microelectronics in Fishkill, N.Y., also confirmed that SGI is currently a customer.
SGI executives also said in a conference call Monday that the supplier was the sole source of wafers and ceramic packages.
Since IBM's technology is most commonly used in leading-edge components, those components are most often used in the most advanced systems. Because of this, the shortage has hit SGI's highest-margin Onyx and Origin systems the hardest, Covert said. But the issue is not a question of SGI being passed over in favor of other companies.
"I think it's a question of order rates," Covert said. "They need to achieve higher capacity to fill the demand."
SGI's ties to IBM prompted the company to warn of lower earnings earlier in October, and on Monday SGI reported lower earnings, revenues, and gross margins due to component constraints.
While SGI (stock: SGI) recorded a net loss of $49 million, or 26 cents per share, for the quarter ended Sept. 30, revenue slipped 17 percent to $426 million from the year-ago period. However, orders for the company's products increased 14 percent, indicative of strong demand.
Chief executive Bob Bishop said the company is now trying to expand sales via a "media commerce" initiative, selling servers to companies like Disney (stock: DIS).
"While management indicated that product demand has been healthy," wrote analyst George D. Elling of Lehman Bros., in a research note Tuesday, "we nonetheless believe that SGI remains in transition. To restore confidence, the company must report positive and consistent results."
SGI's stock was down an eighth at press time, to 4 3/8.
A spokesman for IBM said corporate policy forbade him from discussing relationships with the company's customers, including SGI. "But I would like to point out in our third-quarter earnings we made it very clear that there was unprecedented demand for ceramic substrates," he said. "We're trying to meet as much demand as possible, but not everybody is going to get everything they've asked for."
Two weeks ago, IBM announced a $5 billion fab expansion in East Fishkill, N.Y., the company's largest ever. Half of the investment has been earmarked for a $2.5 billion advanced-technology, 300-mm wafer facility in East Fishkill that will employ 1,000 workers.
An undisclosed amount will also go to new wafer-packaging facilities, the spokesman said. IBM had previously earmarked an undisclosed amount of capital to increasing the company's wafer-production capabilities in Fishkill, which will come online during the fourth quarter, he said. SGI currently predicts its second-quarter revenues will increase to $515 million, partly due to the increased capacity.
"This was definitely a major announcement for packaging as well as wafer manufacturing," Dataquest's Walker said. "They're expanding substrate capacity in all three locations: China, Japan, and the U.S."
Capacity constraints have indeed plagued foundries, fabless chip firms, and OEMs alike, Lam and other analysts noted. But on the other hand, IBM has a responsibility to satisfy customer demand, like any other supplier, they said.
"The only thing I know regarding the IBM capital-expansion announcement is that they've been looking for more capacity, since they have more orders than they can handle," said Risto Puhakka, an analyst at VLSI Research Inc., Mountain View, Calif.
"It's a little bit embarrassing to say you're in control of production if you're not. I'd say they have some explaining to do," he said. |
