Skip to main content

Sun Microsystems Burned to a Crisp

The company plans to cut up to 2,500 jobs.


Sun Microsystems


revival fizzled almost as quickly as it began, as the computer maker reverted to its erratic performance of years past while announcing red ink and layoffs.

Sun executives blamed a weak U.S. economy for its ills, and insisted the company's business opportunities remain strong.

But the explanation did little to appease investors, who sent Sun's shares tumbling more than 14%, or $2.82, to 13.91 -- a new 52-week low -- in extended trading Thursday.

Sun's weak quarterly results marked the first major failure under the leadership of Jonathan Schwartz and Mike Lehman, who took over as CEO and CFO, respectively, in 2006.

The pair returned Sun to profitability last year, after several years of losses, and promised investors that revenue growth and a 10% operating margin were both around the corner.

But the message on Thursday was that neither goals appeared in sight anymore.

Sun projected that revenue in the fourth quarter would be flat year-over-year. And instead of the 10% operating income targeted for next fiscal year, Sun is now aiming for 7%.

Lehman defended the move in a post-earnings conference call Thursday, as analysts questioned the scrapping of a target that the company had billed as obtainable.

"I have consistently stated for the last couple years that in order to hit the 10% operating income, we needed reasonable but not dramatic revenue growth," Lehman said. Absent that revenue growth, he explained, hitting the target would be more difficult.

"It would be damaging to the long term health of the company to take arbitrary action just to hit that number," he later added.

Sun will nevertheless take various steps to cut costs, including cutting between 1,500 and 2,500 employees from its workforce. Sun currently has more than 34,000 employees. The layoffs will mean a $130 million to $220 million charge in the fiscal fourth quarter, and should lead to annual savings of $100 million to $150 million.

The job cuts are the third major layoffs since Schwartz took over.

While the cost-cutting has helped Sun improve its profitability, sales growth continues to remain elusive. And with the souring U.S. economy, Sun's growth prospects only look bleaker.

Scroll to Continue

TheStreet Recommends

Meanwhile, tech firms like


(INTC) - Get Intel Corporation Report



(VMW) - Get VMware, Inc. Report



(IBM) - Get International Business Machines Corporation Report

have continued to deliver solid results despite the slowing economy. In fact,

IBM even cited strength in the U.S. market


Sun executives said its troubles were not the result of market share loss to competitors like IBM, despite the two companies diverging results in the quarter.

For the three months ended March 30, Sun's revenue declined 0.5% year-over-year to $3.26 billion, below the average analyst expectation of $3.37 billion.

"During March, we saw a substantive change in U.S. sentiment," Schwartz said, as orders from large customers were pushed out, and Sun's distribution partners experienced slower-than-expected sales. The result, Sun executives said, was that revenue came in about $200 million lighter than the company's internal expectations.

The slowdown was most pronounced at the high-end of Sun's product lines, particularly for enterprise servers and tape-storage systems. Revenue in Sun's computer systems business declined 1.8% year-over-year, while the company's storage revenue fell 5.4%.

Sun said that sales outside the U.S. were strong, with double-digit revenue growth in key emerging markets like India and Brazil. But international sales were not enough to offset the weakness in the U.S. market which accounts for roughly 40% of Sun's revenue.

Sun posted a loss of $34 million, or 4 cents a share, in the fiscal third quarter. The results included a 4-cent-a-share charge related to its acquisition of MySQL. At this time last year, Sun earned net income of $67 million, or 7 cents a share.

Analysts had expected Sun to earn 18 cents a share, but it wasn't immediately clear what items the estimate included.