November 1, 2005 2:17 PM PST

Sun loss levels; acquisitions bring growth

Sun Microsystems on Tuesday reported a slightly narrower net loss of $123 million for its first quarter of fiscal 2006 versus previous year. The figure included results from the acquisitions of Storage Technology and SeeBeyond, as well as the mandatory arrival of stock-option accounting.

The net loss amounted to 4 cents per share using generally accepted accounting principles, the same with the year-earlier period with a loss of $133 million. Excluding a number of charges, the company's net loss was $68 million, or 2 cents per share. That was deeper than the average 1 cent loss analysts expected, according to Thomson Financial.

Revenue increased 4 percent to $2.73 billion for the quarter, which ended Sept. 25, from $2.63 billion a year ago. Of the revenue, $226 million was from StorageTek and Seebeyond, Sun said. Analysts expected an average of $2.89 billion.

Chief Executive Scott McNealy expressed optimism about the results and the affect of the company's acquisitions on its earnings. "Clearly the numbers are looking nice. We are turning cash into inorganic growth," he said.

Investors disagreed, sending Sun's stock down 15 cents, or 4 percent, in after-hours trading, from the market close price of $3.85.

Sun long has resisted regulatory requirements to report stock options as an expense, but this quarter the company had no choice. The move resulted in a $50 million charge, the company said.

The Santa Clara, Calif.-based Sun is in the midst of a major transformation to try to restore its ailing financial fortunes. It's banking on several efforts: the new "Galaxy" line of x86 servers, a revamp of the Solaris operating system to make it an open-source project and suited for x86 servers; a push to sell the Java Enterprise System server software; and a rejuvenation of the core UltraSparc server family.

However, it has many challenges ahead. Chief Financial Officer Steve McGowan announced plans to retire last week, the same day that shareholders voted against a "poison pill" provision that would have made it difficult to acquire Sun.

The company had $224 million in cash flow from operations for the quarter, with cash and marketable debt securities of $4.53 billion.

Making the most of margins
Gross margin increased 2.7 percentage points to 44.1 percent in the quarter from 41.4 percent in the quarter ended June 30.

Sun boasts of its increasing gross margins, a measurement widely predicted to decline as the company enters the competitive market for x86 servers. Sun already has become a lower-end server company in many ways: Though it sells machines with as many as 72 processors, 75 percent of units shipped have between one and eight processors.

"We're in transition from being an E10K, E25K company to one that is predominantly in the one- to eight-way space, while improving gross margin dollars," McNealy said. "As we add software services, utility services, we believe we have an opportunity to improve productivity and cut costs while growing our way to a better and more comfortable operating margin."

One way that Sun is counting on improving that margin is by selling Solaris support as well as the Java Enterprise System server software. But Windows and Linux remain much more popular operating system options. "About a quarter" of Sun's x86 servers use Solaris, President Jonathan Schwartz said, "but the numbers are ramping."

More than 3 million copies of Solaris 10, available for free since January, have been downloaded, Sun has said. Most of those copies are run on x86 computers, and most of those computers come from Hewlett-Packard or other non-Sun companies, Sun said.

The company shipped about 71,000 servers in the quarter, of which 14,000 used Advanced Micro Devices' Opteron processor. None of those were the new Galaxy systems announced in September and shipping in October, but shipments of earlier AMD Opteron-based server models increased 109 percent compared with the year-earlier quarter, Sun said.

However, Galaxy system sales hurt shipments in the quarter, McGowan said. "Though Galaxy was well received, there is some indication that customers may have delayed purchases for these products," he said. In a later conference call with reporters, he added that customers in Japan and the financial services industry were particularly inclined to delay purchases.

Java Enterprise System subscriptions are another way to increase margins on a server sale. Sun sells subsets of the software to companies for $50 per employee per year--letting the customer use as much of the software as desired--or sells the entire suite for $140 per employee per year.

Sun has sold 957,000 JES subscriptions so far, 429,000 of them the suites, McGowan said.

McNealy also claimed progress against IBM's Power processor family, which Big Blue began upgrading in October with the Power5+ model. "The Power5+ announcement was very underwhelming. It was nice to finally see them not exactly execute on a new speed bump," McNealy said.

5 comments

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Scott McNealy should be fired...
Sun seems to be a company obsessed with bringing down MS. That seems to be the sole purpose of this company. It invested millions of dollars into creating software like StarOffice, not with the intention of making money, but just with the hopes to undermine another company, just plain ridiculous. Even now with its share value hovering around 3$ its main focus is derailing MS not by creating products that are better, like a better DB to compete with SQL Server and turning a profit and focusing on its core expertise in backend server business, but by creating worthless free MS office clones.
Scott is an obsessed guy, he should be fired and replaced by someone who would focus on restoring Sun to its past glory by creating excellent marketable products and return value to its investors. Otherwise at the rate Sun is loosing market cap it would end up being acquired by some other company and become its subsidiary.
Posted by FutureGuy (742 comments )
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Why better supported instead of fired
Hi!

Comments and complaints are of great Value for true progress, if taken into consideration :-). The thread brings up valid points, but for the sake of P from PROGRESS in my opinion Scott should be rather supported instead of fired, then the P from PROFIT will go high too. While not hired by SUN (yet), help I am aware of could double SUN's share in just one year!

When it comes to win-win games defining true Progress, you don't fire people with "vision", but rather improve that vision if you can, and/or support. Yes, good execution, marketing, RIF and how to talk to Wall Street end usually in good immediate profit. Would one really like few cents/share by a RIF leaving people w/o job? Then if Scotts' bliss is that by A LAB to usher in a Participation era where free SW is just a beginning of a tremendous progress, following such bliss may work as an invisible hand and bring in the right investors, partners, i.e. support.

What if such "invisible hand" really exists?
Posted by MyKbala (1 comment )
Link Flag
Fire Scott McNealy, I agree
Sun is a Lab, a big Lab. It think in Engr way, its Marketing is non-functional and in fact also in Lab mode (throwing everything on the wall and see what can stick).

Sun usually fails to produce "ready-to-use" products. Those server/soft are technically rigt but totally useless.

It always show you "vision" and failed to execute internally.

Multi-core chip ? Yes, Sun claim this idea long long ago and finally will ship out its 8corex4th chip. Let's see, AMD and Intel will ship out equally performant product at much less price soon. It'll take about 3-4 times longer before a Sun's product being recognized worthy than products from Intel/AMD/DELL. Any Sun's competitors can easily beat Sun even in "catch up" mode.

So what is the problem ? It's ability to execute.

Galaxy ? fast enough ? let's see the Market.
Solaris 10 ? big buzz ? who care ?
Java ? Hot!! Wildly used ? Where is Sun's profit ?
JES ? JokESoft ? How many "subscriber" now ?

In fact, there is no other company CEO can be so stupid to ruin so many chances to win back.

Scott! your time is up ! Get out !
Posted by publicstatic (11 comments )
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McNealy A Bust
Scott has never taken the steps to really get Sun out of its preolonged slump.

The company still has 8000-10000 employees too many. McNealy has never taken this step.
When the company was doing fifteen billion dollars plus in revenue it had 24000 employees.
Now it is barely doing 13b with a stupifying 35000 employees.

Field marketing was the only marketing strength the company ever had. It has been sliced to the bone and everything comes out of a know-nothing,
field-ignorant corporate marketing staff.

Ed Zander was the only marketing genius the company ever had and knew had to talk to Wall Street. McNealy couldn't ley go and let Ed run the whole company. So he left, went to Motorola, and brought them back from the moribund.

Scott needs to retire with his millions and just play ice hockey and golf.
Posted by kalison1 (3 comments )
Link Flag
Did they get past Web 1.0 ?
Sun was crucified by the burst of the internet bubble. They took too long to reduce headcount and get into open source and X86. They continued to push Sparc/Solaris when it wasn't competing well against Linux, AIX and Windows on Dell/HP/IBM hardware.

Now things are getting better. Microsoft paid a bunch of money to settle a Java lawsuit last year. Solaris 10 is way faster with Containers and a new TCP/IP stack. JES is getting some traction with 1m subscribers ($100m/year). The Galaxy line is awesome for price/performance and performance/watt. Finally, the next generation of Sparc chips - Niagara - looks certain to inject new life into Sparc and consequenty Solaris. And then there's a secret NAS storage offering called "Honeycomb" coming out soon (we hope!).

But the bottom line is the "P" word - PROFIT. As Sun investors, we've been patient and listened to the "jam tomorrow" stories from Scott for a long long time. But now it's time to see quarter-on-quarter profitability. Scott is drinking in the last-chance saloon.
Posted by hutchike (157 comments )
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