Intergraph Is Whistling Anchors Aweigh

Intergraph Corp. doesn't usually spring to mind as a hot manufacturer of computer workstations. People tend to think first of Sun Microsystems, Hewlett-Packard, or DEC in that $9.2 billion market. But don't tell that to the U. S. Navy. It recently decided to spend $362.4 million with the Huntsville (Ala.) company for 2,800 workstations, computer-aided design and manufacturing (CAD/CAM) software, and related services. That's a big endorsement for Intergraph, for years a favorite with architects, construction engineers, and mapmakers. But more important, it's an in-your-face rebuttal to critics who have derided Intergraph Chairman James W. Meadlock's stubborn attachment to a line of homegrown workstations that use a little-known RISC (reduced instruction-set computing) microprocessor called Clipper. Intergraph builds the chip for itself and only a handful of customers. That lack of buyers, say critics, spells eventual trouble. Over the long term, they figure, Clipper-related sales won't be enough to pay for ongoing improvements to the chip.

For now, though, Intergraph is gloating over the Navy win. It bested a team that paired Prime Computer Inc.'s Computervision unit, a leader in mechanical CAD systems, with Sun Microsystems Inc. Computervision plays down the loss, claiming the Navy's tough specifications leave little room for profit. But Meadlock reckons otherwise. "We weren't growing as fast as we'd have liked in the mechanical CAD lines," he says. "This gives us tremendous momentum."

Investors seem to agree. After bottoming out last year at 10 1/2, Intergraph's stock surged to more than 31 just after the Navy announcement. That's quite a comeback for a company whose earnings disappointments in recent years (table) have left it a Wall Street outcast.

To its credit, though, Intergraph has remained in the black through a period of tumultuous change. Started in 1969 by Meadlock and a group of other former IBM engineers assigned to the Apollo space program in Huntsville, Intergraph first made graphics software that ran on Digital Equipment Corp. minicomputers. As workstations took over from minis in the mid-1980s, Meadlock began building his own with Fairchild Semiconductor Corp.'s speedy Clipper chip. Fairchild never signed up many other customers for Clipper, though. When National Semiconductor Corp. bought Fairchild in 1987, it decided it could no longer fund Clipper. So, Intergraph purchased the manufacturing rights and a Fairchild factory in which to build the orphaned chip.

BRAVADO? In one sense, Meadlock's gamble has paid off. The company's sales cracked the $1 billion mark for the first time in 1990. That's a 72% increase from four years earlier. But profit margins have remained anemic as the company battled for fourth place in the ultracompetitive workstation market. Intergraph last year had 5.2% of the world market, according to market researcher Dataquest Inc. And it's nearly certain to fall to fifth this year as IBM's RS/6000 gains share.

Therein lies Intergraph's dilemma. Given the company's minuscule presence in hardware, Dataquest analyst David Burdick questions whether Intergraph can afford the $50 million to $100 million he estimates must be spent annually to keep Clipper competitive.

Eliott D. James, named Intergraph's president in 1989, says only that Burdick's cost estimate is wildly high: "We've been in the performance race for a long time. We know how to compete." Further, he says, Intergraph's gross profit margins for hardware systems remain comfortably above 50%, so there is no immediate pressure to stop building hardware.

Analysts regard that as so much bravado. Inevitably, they figure, the company will become purely a software supplier. Indeed, early this year, Intergraph said it would modify its mechanical and electronic CAD software to run on Sun workstations. The move was prompted by its $14 million purchase of Daisy/Cadnetix, whose electronic CAD software runs on Suns. "I see this as controlled revolution," says Alex. Brown & Sons analyst Harvey C. Allison.

Intergraph executives dispute that forecast, countering that for many workstation buyers, hardware speed doesn't matter as much as getting the proper software. They point to Intergraph's growing success in a new niche: emergency dispatch systems.

EMERGENCY HELP. One early customer was Troy, Mich., a suburb of Detroit, whose police and fire departments began using a $385,000 Intergraph system in early April. It provides information on each caller's location, including detailed maps to help direct emergency vehicles around traffic bottlenecks. "The ease of use is amazing," says Lieutenant Thomas B. Houghton of the Troy police. "Training was a real cinch." Other Troy city departments can use the system's digitized maps for zoning, utilities, and property tax purposes.

Indeed, Intergraph's strong lead in geographical information systems could see a big boost in coming months: Kuwait, beginning to rebuild after the gulf war, has for years kept maps of its streets, telephone lines, and sewers stored on Intergraph machines. Intergraph is already a big supplier to Bechtel Group Inc., which recently won a prime construction contract from Kuwait. And it just signed a $12.6 million deal with Consolidated Edison Co. of New York Inc. for a mapping system.

Even before the Navy contract win, analysts were boosting their earnings projections--from $1.40 a share to $1.70 for 1991. Still, they worry that Intergraph's recent attention to marketing has meant additional overhead, which now must be matched by higher sales.

So far, Meadlock is looking good. Intergraph announced on Apr. 15 that first-quarter earnings rose 33%, to $19.9 million, on sales of $287 million, which were up 25% from the year-earlier period. Given that momentum, there is little chance that Meadlock will abandon the hardware business soon. The big Navy contract seems to signal the order for full speed ahead.

Before it's here, it's on the Bloomberg Terminal.