Posted: 9:00 p.m. EST, 4/15/98

NEW YORK — Silicon Graphics Inc. will spin off MIPS Technologies Inc. as an independent company, and will sell up to 20 percent of its stake in MIPS via an initial public offering that's expected to close in June.

SGI will continue to develop MIPS microprocessors for the platforms in its computer systems organization, but will also develop systems based on Intel processors. While focusing on high-performance computing, SGI will pursue a dual-platform strategy in its workstation and server product lines. It will develop Intel-based Windows NT systems, plans to port its IRIX flavor of Unix to Intel IA64-based systems, and will phase out its high-end MIPS processor development work by 2001.

At a Tuesday press conference in New York, Richard E. Belluzzo, chairman and chief executive of SGI, said the plans mark a new beginning for SGI, which has struggled in recent quarters with operational problems and product delays. The new strategy, which includes formally structured profit centers and cost-cutting measures, will allow SGI to become "the growth engine we have the potential to be," Belluzzo said.

Industry observers took a positive view of the spin-off, given the different requirements of MIPS' embedded RISC processor business and SGI's high-end computer business.

While MIPS' future is clouded by a lawsuit filed against Lexra Inc. , the spin-out will be closely watched. (Lexra claims to offer MIPS-compatible micropro cessor cores, though it is not a licensee of MIPS' technology.) A MIPS spokeswoman declined comment on the revenue potential of the MIPS spin-off.

Whatever its future, its past success is evident. MIPS Technologies has designed and licensed RISC processors for a range of applications, including the Nintendo 64 and Sony Playstation gaming systems, Web TV, Windows CE-based products, satellite television receivers, digital cameras, laser printers and digital cable set-top boxes.

SGI said 48 million MIPS RISC processors were shipped in 1997, which made it the world's number one RISC architecture for the second consecutive year, the company said. Those unit shipments include sales by MIPS' various licensees, including Integrated Device Technology Inc., LSI Logic Corp., NEC Corp., NKK Corp., Philips Semiconductors, Quantum Effect Design Inc. and Toshiba Corp.

Belluzzo said the spin-off of MIPS was intended make the focus of SGI clear to employees and management. He suggested that MIPS would have more success as an independent company than as part of SGI.

Tom Copeland, director of workstation research at International Data Corp. (Framingham, Mass.), said the MIPS business took attention that SGI's management team could have devoted to the company's core business.

SGI's decision to revamp the company and to migrate to an Intel architecture makes sense, Copeland said, and follows similar moves by other workstation and server makers, including Hewlett-Packard Co. and Digital Equipment Corp. The decision probably stemmed from the great expense of maintaining microprocessor development, he said. "System architecture and software will be the differentiators in this market, while the MPU becomes more of a commodity," Copeland said.

The market for Intel-based workstations is growing, while unit shipments of Unix systems declined 10 percent from 1996 to 1997, while revenue for those systems declined 16 percent over the same period, Copeland said. The Unix workstation market will co ntinue to decline at 4 to 5 percent a year, the analyst said.

With its target market shrinking, analysts said SGI had little choice but to focus on industry-standard computing. That move, Belluzzo said, will help SGI reassert its leadership in technical computing and will "double its addressable market."

In 1997, SGI held 26 percent of its addressable market of Unix workstations, technical servers and supercomputers, market watchers said.

SGI's expects to introduce its first NT workstations with Intel's IA32 technology in the second half of this year. It plans to port its established 64-bit IRIX operating system to Intel's IA64 Merced platform by 2001.

The company will continue to focus on the communications, energy, entertainment, government, manufacturing and science sectors, and will extend its reach into the technical enterprise market with a focus the strategic business analysis, Internet data center, and media serving segments.

Rather than operate more than 25 business units, SGI will now operate six formal profit centers, for NT workstations, Unix workstations, high-end graphics systems, Origin systems, Cray systems, and service and support.

The tighter corporate focus results from the efforts of Belluzzo, an operations wizard who previously ran all of Hewlett-Packard's computer businesses. His management team at SGI includes chief financial officer Steven J, Gomo, also from HP, who created a new business model for SGI. Under that model, Gomo expects SGI to reduce operating expenses by $200 million for fiscal year 1999. Those reductions will be made via a series of initiatives, including a headcount reduction of 1,000 employees (achieved through attrition and a hiring freeze), reducing facility requirements, streamlining business process , lowering capital spending and outsourcing manufacturing .

As part of the new model, SGI plans to divest its Cosmo Software 3-D Web products business by the end of the fiscal year.

On the technology front , SGI will build around two pillars — visual-computing technology and high-performance computing technology, said Robert H. Ewald, executive vice president of computer systems for SGI.

The company will also engage in a joint marketing effort with Intel to estabish SGI's Intel-based Windows NT workstations in the market.

The companies' relationship complements the agreement SGI made late last year with Microsoft Corp. to jointly define, develop and deliver new graphics technologies as part of a project code-named "Fahrenheit." Fahrenheit is expected to enable users to run applications across both Unix and Windows NT machines.

SGI's product and technology road map calls fordual platforms across the company's product lines. SGI is committed to upgrading its processors every 6 to 9 months, and its graphics subsystems every 12 to 18 months, Ewald said.

The company said it will invest in its three system architectures — cc-NUMA, MPP and Vector — out to 2001.

In workstations, SGI plans to produce processor and graphics-subsystem upgrades for the Onyx2, Octane and O2 in the coming months. Later in 1998, it will deploy its graphics and media expertise on the Intel-based NT platform. Intel and SGI will work further on 64-bit systems as Intel's Merced processor becomes available in 1999, and as SGI ports the IRIX operating system to Merced.

In servers, SGI will continue to offer the cc-NUMA architecture, and servers will continue to receive upgrades via faster MIPS microprocessors.

In supercomputers, SGI plans to invest in its Cray Origin2000, Cray J90, CrayT90 and CrayT3E lines. Over time, those four lines will converge into two related successor lines. The converged lines will incorporate the cc-NUMA architecture, scalable IRIX with Windows NT interoperability and CMOS technology, the company said.

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