SAN FRANCISCO -- With one of the pillars of its business crumbling, Sun Microsystems ( JAVA) is going into bunker mode. Executives at the troubled computer maker announced a $1.7 billion net loss on Thursday, along with a hefty write-down, and promptly declared an information blackout. Sun suspended any financial forecasts for the remainder of the fiscal year and threw into doubt its previous operating targets. Sun executives also hinted that it was evaluating a variety of unspecified actions to return to profitability, but declined to provide any details. Shares of Sun, which are down 75% in the past twelve months, were down 16 cents at $5.13 in extended trading Thursday. "We're clearly experiencing a challenging economic environment," Finance Chief Michael Lehman told analysts in a post-earnings conference call Thursday, citing Sun's exposure to customers in the imploding financial sector at the center of the global credit crisis. In its recently-ended fiscal first quarter, Sun's sales of computer systems fell 15% year over year, while sales of storage systems grew a scant 0.4%. What's more, the portions of Sun's business suffering the most are the high-end computer servers and tape archiving systems - traditionally big-sellers at banks and other financial institutions - which carry some of the company's beefiest profit margins. That put pressure on Sun's gross margin, which fell to 40%, vs. 44.3% in the previous quarter, and 48.5% at this time last year. "My conversations with customers reflected consistent anxiety and a desire to push off large-scale purchases," said CEO Jonathan Schwartz.
Sun is not alone in feeling the heat from the financial crisis and the souring economy. Earlier this month, IBM ( IBM) said sales of its computer systems were down 11% year over year, with sales for one of its server product lines down 18%. But the company managed to grow its overall revenue 5% and post a $2.8 billion profit thanks to its diversified business selling technology services, software and hardware across the globe. Sun's menu of products and its geographic footprint is much more concentrated than some of its rivals however. In its fiscal first quarter, which ended Sept. 28, Sun wrote down $1.45 billion, which it said reflected the entire amount of goodwill associated with its computer systems business. Sun had warned investors that the write-down was coming in a pre-announcement last week, though it did not specify how large the charge would be at the time. Sun posted a net loss of $1.67 billion, or $2.24 cents a share, vs. net income of $89 million, or 10 cents a share, in the year-ago period. Sun said the loss included the goodwill write down, as well as $60 million in restructuring charges and $49 million in stock compensation expenses. Excluding those charges, Sun said its net loss was 9 cents a share. Analysts polled by Thomson Reuters were looking for a loss of 8 cents a share, excluding most charges, but including the stock compensation expenses. Revenue in the quarter was down 7% year over year at $2.99 billion, roughly in line with analyst's dampened expectations following the pre-announcement.
Schwartz said the company experienced strength in certain of its product lines, despite the challenging economic situation. He pointed to sales of Sun servers that feature the company's Niagara chip, which increased 83% year over year. Sales of so-called Blade servers, which use proprietary Sun chips as well as industry standard microprocessors from Intel ( INTC) and Advanced Micro Devices ( AMD), were up 23%. And he said Sun's continued embrace of open source software, such as the Solaris operating system and the recently-acquired MySQL technology, are opening doors to new sets of customers. According to Schwartz, about 11 million companies use MySQL technology, very few of which currently use Sun hardware. Of course, Sun has been trying to grow its revenue through a similar strategy for a couple of years, with little to show for it. And as economic conditions continue to deteriorate, the company will need to reassess its spending. "We understand that we need to balance our costs in light of the new economic reality," Schwartz repeated several times during Thursday's call, promising to provide investors with an update when the company has something to announce.