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SGI buys back spun-out Japanese unit

A homecoming

Supercomputer maker Silicon Graphics wants a lot more business in Japan, the world's third largest economy. To get that business, the new SGI (the combination of Rackable Systems and Silicon Graphics) is buying back a Japanese unit that the old SGI sold off when it went into Chapter 11 bankruptcy back in May 2006.

In a conference call with Wall Street analysts after the market closed on Wednesday, Mark Barrenechea, SGI's chief executive officer, explained why the company was paying $17.9m in cash to acquire SGI Japan Ltd, a company that the Rackable-SGI held a 10.4 per cent stake in by virtue of the $42.5m acquisition of SGI's assets back in May 2009.

"Japan is a large and strategic market for technical computing," Barrenechea said, adding that it would allow SGI to accelerate its revenue growth rate for its fiscal 2011 and 2012 and add to profits. "This acquisition allows us to reach critical mass in Japan and the Asia/Pacific region."

SGI Japan Ltd was founded in 1987 as Nihon Silicon Graphics to resell and support SGI's supercomputers and workstations in Japan. In 2001, when the server market took a dive concurrently with the global recession in the wake of the dot-com boom, SGI sold a 40 per cent stake of the unit to NEC. In March 2006, when the original SGI was sputtering again, Sony and Softbank acquired stakes in SGI Japan, getting a controlling stake, and acquired the European broadcasting unit and created a division called Silex Media to sell supercomputers, storage, and workstations to broadcast and media companies. In May 2006, when the old SGI went into bankruptcy protection, its stake in the Japanese unit had fallen to 10.4 per cent. SGI Japan sold SGI and other gear, and offered support for this iron. The support revenue did not flow back to the former parent company, and this is obviously the lucrative part over the long haul.

Under the agreement with SGI Japan, the new SGI will be buying all of the stock in the company for $17.9m in cash. NEC, Sony, Softbank, Canon, Nomura Securities, Morgan Stanley, and Jafco all had stakes in the Japanese firm when the deal went down this week. Jim Wheat, SGI's chief financial officer, said that SGI Japan had $24m in cash on hand, $7m in accounts receivable, $11m in accounts payable, and $10m in short-term, one per cent debt that SGI would retire when it comes due. Wheat said that SGI Japan also had $90m in net operating losses on its books, which SGI would be able to absorb to help boost its own bottom line. Equally important is the fact that SGI will now be able to directly serve Japanese multinationals that have global operations and will be able to remove some back office costs to boost the overall profitability of the combined companies.

Neither Barrenechea nor Wheat said how much revenue or profit SGI Japan generated, but they both said the deal would be accretive to SGI's earnings. The company also boosted its fiscal year 2011 guidance to $600m to $625m (those are non-GAAP numbers that include services and software sales that spread out over time as they hit the GAAP books). That's an increase of $30m in revenues, and represents somewhere between 14 and 19 per cent revenue growth for fiscal 2011. SGI is now saying that it will see somewhere between 15 and 20 per cent revenue growth in fiscal 2012; the company expects to be profitable in both fiscal years.

SGI Japan has 272 employees and has six offices in the country in Tokyo, Osaka, Tsukuba, Sendai (where the earthquake and tsunami hit today), and Aichi. SGI Japan has 400 customers, including government agencies, universities, media companies, manufacturing firms, and telco providers. These include Toyota, Mazda, Suzuki, Mitsubishi, Toshiba, Panasonic, NTT, the Atomic Energy Agency, and the University of Tokyo, Hokkaido University, and Tohoku University.

Nobuhiko Nakatsu, who was president and chief executive officer of the independent SGI Japan Ltd has been named president of the SGI Japan division that is created from the acquisition. He will report to Tony Carrozza, senior vice president of worldwide sales at the SGI parent company. ®

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