October 17, 2002 4:46 PM PDT

With layoffs, Sun eyes profitability

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update Sun Microsystems announced on Thursday that it will cut 4,400 employees in a move to get the company back to profitability by the first half of 2003.

The Santa Clara, Calif.-based server maker reported a first-quarter net loss of $111 million, or 4 cents per share, on revenue of $2.7 billion. In the year ago quarter, the company reported a net loss of $180 million, or 6 cents per share, on revenue of $2.9 billion.

Including a $31 million loss on investments, a $24 million charge for previous restructuring activities and a $22 million gain from tax effects, Sun reported a loss of $78 million, or 2 cents per share. Analysts expected the company to report a loss of 4 cents, according to First Call.

Revenue for the quarter fell under the company and Wall Street's expectations. Revenue in the U.S. dropped 7 percent, while revenue from Japan fell 13 percent.

Chief Financial Officer Steve McGowan said Sun plans to cut about 11 percent of its work force, reducing the number of employees from 39,400 to about 35,000. The figure includes 1,000 cuts announced six months ago, but doesn't include further cuts that will affect contract and temporary workers, he said during a conference call Thursday.

Thursday's layoffs are in addition to a 3,900-person reduction announced a year ago.

"Getting down 20 percent over an 18-month period is a tough decision, but it's the right one to do at this point," Chief Executive Scott McNealy said.

McNealy called the cuts "reasonable and responsible" and underscored that the decision will help Sun continue to earn cash from operations. The cuts will trim about $100 million per quarter from expenses, McGowan said.

Lowering expenses makes profitability possible with less revenue. Sun earlier had needed more than $4 billion in revenue to break even; the new cuts lower that figure to between $3.2 billion and $3.3 billion, McGowan said.

McNealy during the conference call repeatedly declined to offer his views for the current quarter, but said simply that, "We sure hope the economy turns around." CFO McGowan echoed his statement.

"The (customer spending) uptick we expected in the last couple weeks of September didn't fully materialize," McGowan said. Sun was briefly profitable in its most recent quarter.

Sun chiefly makes high-end server computers, networked systems that handle round-the-clock tasks such as bank account transactions. The company is under pressure from weak corporate spending, exacerbated by competition from IBM, Hewlett-Packard, Dell Computer and Microsoft.

Sun surged ahead of rivals in the late 1990s as the company sold its equipment for Internet operations and new computing projects, but the spending spigot has been shut to the point where Sun's revenue is nearly half of what it was during the company's peak. In September, McNealy acknowledged boom-era mistakes of overhiring and grabbing too much real estate.

The job cuts were less drastic than the reduction of up to 8,000 workers that some analysts had expected. Cuts will affect all divisions but will hit research and engineering divisions less hard, McGowan said.

Sun will take a charge of about $300 million in the second quarter ending Dec. 31 as a result of the layoffs. Job cuts will begin in the next four weeks in the United States, McGowan said.

In after-hours trading, Sun shares rose to $3.08 on Island ECN.

The company is also trying to cut internal costs. For example, it consolidated 109 separate servers for international operations onto a single system running an Oracle database, McNealy said.

Research and development for the company is stressing projects with direct payoffs, leaving the more exotic projects to start-ups, McNealy said.

"We're very focused R&D that doesn't have a lot of experiments going. We'll do experiments in places like Afara and Pirus and if it works out, we'll buy the company."

McNealy said that the company's forthcoming UltraSparc IV processor has "taped out," meaning that Sun has sent the design to Texas Instruments to build prototypes. "We'll be seeing products on that in approximately a year," McNealy said.

StarOffice, a competitor to Microsoft Office, claimed $5.8 million in revenue for the quarter, McNealy said. "We're shipping hundreds of thousands of copies of StarOffice," he said.

McNealy announced several new customers, including FedEx, Sears, Boeing, Delta Air Lines and Travelocity. In addition, the Taiwan health care system will use 22 million Java cards, credit card-sized ID cards that carry a tiny chip for activities such as authenticating a person's identity.

 

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