Sun Replays Its Cost-Cutting Hand

The company is planning its next round of layoffs.
Publish date:


Sun Microsystems

(SUNW) - Get Report

has insisted that it does not intend to cut its way to growth.

But if the company has figured out some other way to increase its bottom line, it has yet to reveal it.

The company disclosed in a regulatory filing Tuesday that it is planning another round of layoffs as part of a plan to "better align the company's resources with its strategic business objectives."

Sun did not specify how many jobs the staff reduction would affect, but said that it expected to incur restructuring charges of $100 million to $150 million in the next couple of quarters, primarily resulting from cash severance costs.

Shares of Sun were off a penny at $4.95 in midday trading Tuesday. The stock is down 27% from its 52-week high of $6.78.

The workforce reduction comes a little more than a year after Sun announced plans to eliminate up to 5,000 jobs from its payroll -- one of the first moves undertaken when

Jonathan Schwartz succeeded Sun co-founder Scott McNealy in April 2006.

The job cuts, along with other measures such as selling its real estate in Newark, Calif., have helped Sun notch three profitable quarters in a row.

In the quarter ended June 30, Sun

delivered an 8.5% operating margin, besting its own target of 4%. With revenue coming in flat year over year, Sun achieved the feat thanks to a 25% reduction in its operating expenses.

To be sure, overhauling Sun's cost structure is something many analysts believed was long overdue.

And it's not as if Sun isn't taking steps to stimulate its sales. The company has made a radical change in its business model by selling servers based on industry-standard processors from


(INTC) - Get Report


Advanced Micro Devices

(AMD) - Get Report

, and it has developed innovative products such as the so-called Thumper, which combines server and storage capabilities.

On Monday, Sun unveiled its latest version of the Niagara chip, the UltraSparc T2, which it will sell in its own line of servers and as a standalone chip to other networking equipment and computer makers.

Despite the various moves, however, Sun's product revenue, which accounts for two-thirds of total revenue, is not showing many signs of life: Product revenue was down 1.3% year over year in the most recent quarter.

Sun has set a target of hitting at least 10% operating margin in its 2009 fiscal year, even as it projects that revenue in the current fiscal 2008 will grow only in the low-to-mid-single digits.

That suggests that cost-cutting, rather than robust sales, will continue to be the driving force going forward.

Sun has managed to wash the stains of red ink from its income statement, but its stock may be waiting to hear the other side of the story.