Silicon Graphics (SGI) has been around since 1981 – even before I became an analyst. It never challenged the market shares of the bigger vendors, remaining a specialist – initially in workstations and latterly in high performance technical computing, (unusually for an x86 server vendor) scale-up computing for in-memory databases and analytics. In fact it signed an OEM agreement in February with HPE to provide the means of creating 8-way Xeon servers. Although it made a profit in calendar H2 2016 (the last quarter of its financial year) it has shown negative net income in many quarters – adding to -$448m in the period from July 2012 – one reason why HPE is paying only $275m for it (a paltry sum in comparison with many of the acquisitions currently underway in our rapidly consolidation market).
My chart show the combined company revenues by quarter from H2 2012 to Q2 2016. You wouldn’t notice much difference if I had removed SGI’s numbers. HPE’s server market share will be 0.4% higher and it will add 97k server to its 15m installed base (my estimates) by buying SGI. However you shouldn’t let this into thinking this an unimportant acquisition. Like Cray SGI does a lot of its business with various US Federal businesses and is extremely well respected for its ability to apply industry standard components into high performing servers.
HPE made the decision some time ago to move change the engines of its various Business Critical servers from Itanium to Xeon and it continues to supply very powerful Superdome machines across the world. Building scale-up as opposed to (otherwise predominant) scale-out servers is a hard thing to do technically – buying SGI will change its OEM agreement into internal expertise. HPE needs this technology to compete more effectively with IBM Power and Oracle Sparc servers – especially for database and analytic workloads, since it is one of only a few areas in which Intel’s standard approach is behind. As the world’s largest server supplier HPE needs to be competitive in every product type and SGI will give it extra bite at the high-end.
But it’s not just about servers – SGI also makes a significant proportion of its revenues from storage (necessary for Big Data expertise) and services (very important for users of high performance computing) – see my Figure.
What does the announcement mean for the industry? One less supplier means less choice in future, but we should expect nothing less in this period of continued economic sluggishness. I see this is part of an organisation realignment of vendors (something I’ve termed ‘Matrix Integration’) in which suppliers buy birds of a feather, while jettisoning or leaving their non-core businesses as semi-autonomous companies., There’s a big difference between large slow-moving operations with small profits (outsourcing), small dynamic fast-moving ones with good profitability (software, Cloud) and large core businesses where you have reasonable profitability based on your customer approach and expertise.
HPE’s move for SGI will help it compete more effectively with Dell, which is now much better positioned for a server push into the enterprise through the addition of EMC. Of course I’ll be writing more about Matrix Integration in general and Dell/EMC specifically in the near future.