October 5, 2001 7:40 AM PDT

Sun warns of job cuts, earnings shortfall

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Ed Zander, COO, Sun Microsystems
Sun Microsystems said Friday that it will lay off 9 percent of its work force and that its first-quarter results will miss estimates.

Sun now expects a first-quarter loss of between 5 cents and 7 cents a share and revenue in the range of $2.7 billion to $2.9 billion. First Call's consensus estimate indicated that Wall Street was expecting the computer systems maker to report a loss of 4 cents a share on $3.29 billion in revenue.

Sun blamed weak technology spending and, in keeping with a number of other tech companies, the Sept. 11 terrorist attacks for its reduced estimates and layoffs. Sun, which ended its fiscal year with roughly 43,000 employees, also said it will take a charge of around $500 million in the second quarter because of its layoffs, which will eliminate about 3,900 jobs.

"The events of Sept. 11 changed everything," said Sun Chief Financial Officer Michael Lehman. "This event had a significant impact. Our business nearly grounded to a halt."

Expectations for Sun's quarter, ended Sept. 30, were already low following the company's midquarter conference call in August. At that time, Sun said low sales in Europe and Japan made a first-quarter profit unlikely. Management refused to comment on revenue expectations, though Lehman had said at the time that "it's going to be a real stretch to meet that $3.7 billion number."

Before the midquarter update, analysts had expected the company to turn a profit of 2 cents a share on sales of $3.7 billion.

Analysts had been speculating that the company would lay off workers. Sun announced in July that it would cut around 300 jobs by the end of the year.

Despite Sun's current troubles, Ed Zander, Sun's chief operating officer, said he didn't believe competitive pressure was hurting the company. In fact, Sun said the competitive landscape is easier for the company now. "On the software architecture side it's just Microsoft," he said. "On the enterprise side it's IBM."

Zander said that, to rebound, the company will launch new products and spend on research and development.

Indeed, the company said its layoffs won't affect the company's R&D department or sales force. "The best thing we can do now is get new products out," he said.

Sun has been seeing increased competition from IBM in the server market. Though Sun recently released its 106-processor Starcat server and the beta of Solaris 9, the next version of its Unix operating system, IBM has also released its competitively priced Regatta server.

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Zander said one of Sun's major pushes in the next couple months will be to differentiate its server products from those of IBM. The company plans to step up an advertising campaign that will "provide clear differentiation with IBM and other competitors," he said. The campaign will position Sun as the "open and simple" option, vs. IBM's more complicated products, he added.

Analysts have cautioned that IBM's low prices may have a financial impact on Sun. "There is little doubt that Sun will retain a high market share--but at much lower levels of profitability than in the past when Sun lacked any real competition," said UBS Warburg Don Young in a research note.

Sun management said it plans to return to profitability, though it didn't say when. Taking new cost reductions into consideration, Sun said it now needs around $3.5 billion in revenue to break even, slightly less than the previous $3.7 billion.

Sun declined to say whether it would have to announce additional layoffs if conditions didn't improve. "We're going to have to stay flexible both up and down," said CEO Scott McNealy.

 

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