Sun Reports $760 Million Loss, Shakes Up Executive Leadership

by Alex Woodie

Sun Microsystems' top two server executives no longer have their jobs following the twelfth straight quarter of losses for Sun. Sun last week announced replacements for Clark Masters, who led the Sun's Enterprise Systems Group, and Neil Knox, who led Sun's Volume Systems Products Group, and others, on the same day it announced a $760 million loss on revenue of $2.651 billion for its third fiscal 2004 quarter, a five percent decline from last year.

Sun is in the middle of tumultuous transitions on many fronts, and those transitions are behind managed by Sun's new president and chief operating officer, Jonathan Schwartz. He is the one who is removing Sun's old guard and replacing it with new executives who presumably think about how to transform Sun in a similar way as he does: from a hardware company that struggles to sell products every quarter to a solutions company that collects money every month, quarter, or year. Schwartz is just beginning to execute plans to lay off 3,300 employees, or 9 percent of its workforce, this year in the hopes of becoming profitable in fiscal 2005.

In the server business, the Santa Clara, California, company cancelled plans for its future "Millennium" and "Gemini" Sparc processors, as we reported last week, as it struggling to ramp up the latest 64-bit UltraSparc-IV processor and create a low-end server business using X86 processors from Intel and AMD. While server spending has been up compared to prior years, Sun has lost market share to IBM at the high end and Dell and Hewlett-Packard at the low end.

On the software front--perhaps the lone bright spot for the company, besides services--the company is in the middle of transitioning itself and its customers to a recurring revenue model, using software subscriptions. (The company also plans to start licensing hardware.) Sun can no longer define itself as the antithesis to Microsoft, in lieu of its recent $1.95-billion settlement with the Redmond, Washington, company and the ensuing partnership to eliminate incompatibilities between the two companies' product sets.

David Yen, who has been in charge of Sparc processor development for as long as anyone can remember, will replace Masters as the executive vice president in charge of high-end servers, although Masters is reportedly considering staying with the organization in another role. Sun also rejiggered its organizational structure last week, and Yen will lead the new Throughput Systems organization, which includes all of Sun's microprocessors, its Enterprise Systems (that's Sparc-based Sun Fire machines), and its Sparc-based Volume Systems business. ESP and VSP are gone, for all intents and purposes. Yen now controls all Sparc development, from the chip up through the systems, as he hinted to us would happen when we talked to him last week.

John Fowler will replace Knox as the executive in charge of Sun's low-end Intel and AMD processor-based server business, which Sun now calls called Network Systems. Fowler will hold dual roles as Network Systems' executive vice president and chief technology officer for Schwartz. Both Yen and Fowler will report to Schwartz, who in turn reports to Sun's chairman and CEO, Scott McNealy. Anil Gadre will replace chief marketing and strategy officer Mark Tolliver, who has left the company; Gadre's title is interim chief marketing officer. Sun also announced the appointment of Brian Sutphin to the position of vice president of corporate development. Both Gadre and Sutphin will report to Schwartz.

McNealy did his best, as he always does, to put a positive spin on his company's third quarter financial results and the executive shakeup. In a conference call with analysts, McNealy said the momentum the company built during the third quarter was "stronger than what the financials might suggest." Much of this momentum has to do with software.

In particular McNealy highlighted Sun's Solaris on X86 efforts, where the company has attracted 600 ISVs to port to the platform, representing more than 1,000 applications. "That's an improvement from the 55 ISVs from last quarter," he said. Registered licenses for Solaris 8 and 9 hit 4 million last quarter, up 24 percent from 3.2 million the previous quarter, he said. What's more, Sun had a "stunning quarter" in signing 81,000 new subscribers for Java Enterprise System (JES), Sun's middleware stack that it licenses for $100 per user per year, bringing total the number of users to 175,000. "We buy into the whole recurring revenue strategies," he said.

As the new president, McNealy said Schwartz's role will be to "monetize" the Sun installed base, through subscriptions and other ways of capturing recurring revenue. "Jonathan's whole mission out there is to go monetize that installed base," McNealy said. "We're going to monetize the unit volume and momentum with JDS (Java Desktop System), JES, Solaris, and our subscription recurring revenues pricing model."