October 16, 2003 4:37 PM PDT

Sun posts deeper loss for quarter

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Sun Microsystems' revenue declined for the 10th consecutive quarter for the three months ended Sept. 28, and the company failed to meet one of its key financial objectives, generating cash from operations.

The Santa Clara, Calif.-based company reported a net loss of $286 million, or 9 cents per share, on revenue of $2.54 billion. That was 8 percent less revenue than the $2.75 billion it reported in the year-ago period. Net loss in the year-ago quarter was $111 million.

Excluding some one-time items, the company had a net loss of 8 cents per share, a Sun representative said, which matched the expectations of analysts First Call surveyed. Those analysts expected revenue of $2.5 billion.

Despite the financial woes for the quarter--the company's first in fiscal 2004--Sun is not changing its strategy and doesn't plan deeper layoffs, at least for now, Chief Executive Scott McNealy said.

"We're doing our best to be a disruptive innovator," McNealy said during a conference call. "We think it's working. It's not showing up in the numbers, and we're not happy with that."

Sun had warned in September of "a particularly difficult quarter...due in part to intense market and competitive dynamics," predicting that it would post a loss of 7 cents to 10 cents per share.

Problems with product quality also hampered Sun. In the quarter ended June 30, a flaw in Sun's lower-end V210 and V240 servers hurt the company. Things got worse in the most recent quarter.

Sun raised quality standards, found more problems, was forced to stop shipping "the majority of our servers," Chief Financial Officer Steve McGowan said. "We are pleased we purged the problems," he added, but the delays meant that 60 percent of the company's revenue arrived in the last four weeks of the quarter.

Sun lost $49 million in cash from operations for the quarter but still has $5.5 billion in cash and marketable securities, the company


Special report
Sun's changing horizon
Despite recent financial calamities,
the company is far from collapse.


said. In the past, Chief Executive Scott McNealy has repeatedly pointed to positive cash flow from operations as a key indicator of the company's viability despite hard times.

When cash flow from operations dipped into negative territory, it broke a 35-quarter streak, McGowan said. Sun doesn't consider the issue of major concern this quarter, however, McGowan said. "I consider this more a blip," he told reporters.

The biggest reasons for the negative cash flow were the overall financial loss and an increase in bills Sun had to pay from spending in the earlier quarter, McGowan said.

Sanford C. Bernstein analyst Toni Sacconaghi, who had expected the negative cash flow, said after Sun's warning in September that he believed that the financial results would trigger more layoffs at Sun. The company cut about 1,000 jobs in September.

But no more cuts will come, at least for now. "We are not planning to perform a major work force restructuring," McGowan said. Sun customers support Sun's strategy and want to see it brought to fruition, he said.

Sun repeated its position that it will take more drastic action if it doesn't meet two objectives: positive cash flow from operations and long-term profitability.

Curtailed spending on the servers, along with increased competition from IBM, Dell and Hewlett-Packard, have hammered Sun. "Server vendors are beating each other up on price," Merrill Lynch analyst Steve Milunovich said in a report Wednesday.

The company is trying to work itself out of its difficulties by embracing servers that are based on Intel processors, putting more emphasis on its software products, boosting services offerings, funding new research and emphasizing integrated collections of software and hardware.

The company spent about $25 million in the quarter for severance costs to cut about 500 people's jobs, McGowan said, with the same expense and job cuts expected again this quarter.

Sun is shipping some of its jobs to areas where labor is cheaper.

"We're carefully looking at doing hiring in lower-cost areas around the world. Some people that leave may be replaced in other parts of the United States and other parts of the world," McGowan said.

Among other cost-cutting efforts, Sun outsourced much of its education and training work, McGowan said.

During the conference call, several financial analysts pressed Sun on the extent of board involvement in the company's strategy and in decisions such as layoffs and management.

"The board has been involved at every step along the way for 22 years. They are absolutely supportive of our strategy," said McNealy, himself chairman of the board.

McNealy also said the board isn't looking for a replacement for Chief Operating Officer Ed Zander, who left the company more than a year ago. "There's been no consideration of a COO role," McNealy said.

McNealy also said the company's decision to accommodate the Linux operating system and "x86" chips from Intel and Advanced Micro Devices doesn't dilute its focus compared with the days when it only supported its UltraSparc chips and Solaris operating system. The focus today is on Sun's Java Enterprise System, the collection of server software that will run on Linux and Intel as well as UltraSparc and Solaris.

"That is the lead arrowhead we're putting all the wood behind in this company," McNealy said of the server software.

Sun declined to offer revenue or profit projections.

One new customer for Sun in the quarter is Hughes Network Systems, which is buying Unix servers, software and training in a five-year, multimillion-dollar agreement for ground infrastructure to support its satellite systems, McGowan said. Other new customers include the Federal Aviation Administration and the Research Foundation of the State University of New York.

The China Ministry of Railways expanded its relationship with Sun as it works to build a computer system for train scheduling. The company is using Sun software as well as company services for design, installation and training, McGowan said.

 

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