Bad News, Good News at Sun

Updated from 8:11 a.m. EST

Sun Microsystems(SUNW Quote) said second-quarter earnings and revenue will fall well short of expectations, and the struggling computer-server outfit outlined a restructuring in which it will cut 3,300 employees and take charges totaling $475 million.

Sun's stock tanked on the profit miss, but recovered when the company subsequently announced an agreement under which Microsoft(MSFT Quote) will pay it more than $1.9 billion to settle antitrust and patent litigation and for royalties.

Sun expects to lose $750 million to $810 million, or 23 cents to 25 cents a share, in the quarter ended March 28, including a $200 million restructuring charge and a $350 million charge to increase the valuation allowance for deferred tax assets. Excluding the charges, Sun expects to lose between $200 million and $260 million, or 6 cents to 8 cents a share, on revenue of about $2.65 billion.

Analysts surveyed by Thomson One Analytics were forecasting a loss of 3 cents a share before charges on revenue of $2.85 billion in the quarter. The stock was hammered on the profit miss, falling as low as $3.93 on the Instinet premarket session, but had recently recovered to $4.20, up a penny.

Sun released a slew of news Friday morning, also announcing that it had entered a cooperation agreement with longtime rival Microsoft(MSFT Quote) that includes the settling of all outstanding litigation. And it named Jonathan Schwartz, its executive vice president for software, to the positions of president and chief operating officer.

Scott McNealy, who some investors have called on to step down, will remain chairman and chief executive of Sun.

Microsoft, which is in the process of being ordered by European regulators to publish the source code for its server products, will pay Sun $700 million to resolve antitrust issues and another $900 million to resolve patent suits. Microsoft will make another $350 million upfront payment under a new royalty agreement between the two companies, with Sun pledging payments when certain technology is incorporated into its server products.