Sun Lays Off Workers in Sparc Server Group

Published: April 13, 2006

by Timothy Prickett Morgan

Late last week, beleaguered server maker Sun Microsystems laid off just under 200 workers, or about 7 percent, of the workforce associated with its Scalable Systems Group, which is responsible for the creation of Sparc RISC processors and the server designs that use them. The move comes a few weeks after a former chief financial officer of Sun, Michael Lehman, returned to that role in the wake of Steve McGowan's announcement that he would retire.

McGowan has been CFO at Sun since 2002, which has been a very bumpy time for the company as the dot-com downturn turned into a run away from RISC/Unix server architectures and toward Lintel and Wintel servers with a dash of Opteron thrown in. Lehman was CFO from 1998 through 2002. It is unclear if Lehman instigated the layoffs at SSG or if these were done by David Yen, the executive vice president of SSG, as a pre-emptive move. Wall Street has been expecting Sun to layoff more workers to move into a reasonable and steady (if not exactly huge) profit, and thus far Sun has been wary of using layoffs--at least to the same extent that others in the IT industry have used them to get their costs in live with revenues.

Sun didn't make a big deal about the layoff at the SSG unit, which had about 2,900 employees before the pink slips went out. These employees are hardware and software engineers, product line managers, marketing people, and various operations managers, and a Sun spokesperson said that Sun was not providing detail on the mix of employees who were let go. Sun did issue a statement on the layoffs:

"Sun is committed to maintaining a cost structure that will allow the company to deliver consistent and profitable growth. While the decision to restructure or rebalance Sun's workforce is never an easy one, the company operates in a very competitive and constantly changing industry. This requires us to periodically assess our workforce requirements against the needs of the company and our clients. Sun continues to evaluate critical business needs and to look for opportunities to realign skills and resources to meet those needs. Sun can confirm that such an action took place this week within our Scalable Systems Group. The SSG management team worked hard to minimize the number of terminations by closing open requisitions, re-allocating resources and increasing organizational efficiency where possible. Unfortunately the effort has resulted in notifications to some of SSG's employees--approximately 200 out of the worldwide SSG employee population. Sun's overall strategy remains the same and our product roadmap is as strong as it has ever been with no significant changes. We will continue to maintain our focus on the Sparc processor and system innovation with binary compatibility. We will also continue to expand the current Sparc hardware and software developer communities through activities like OpenSparc."

The Sun spokesperson would confirm that no other part of Sun had a layoff last week. So this is probably not the restructuring that Wall Street is expecting Lehman to announce after Sun closes out its fiscal year on June 30.

Sun currently has about 39,000 employees worldwide.

The dot-com bubble burst in early 2000--I would say it started in March 2000, personally--and Sun had enough sales momentum to carry it through a few quarters because all of the key industries where Sun sells products took some time to absorb the economic shock. In October 2001, Sun cut 4,400 workers from the payroll, and in the following October, it laid off over 4,300. The company let go of another 3,300 workers in the spring of 2004, and then added a few hundred more later in the year, and then in July 2005, another 1,000 received their walking papers. The total layoffs since 2001 has come to around 13,500 employees.

The announcement of the layoffs at SSG came just as Wall Street was leaning on Sun's returning CFO to take a much more aggressive stance on layoffs. Ben Reitzes, the top IT analyst at brokerage house UBS, issued a report on April 4 calling for Sun to lay off enough workers to attain a 10 percent operating margin. Sun has been running at or slightly below breakeven in good quarters and at a loss in bad quarters for years now, and Sun employees who own stock as well as other investors are getting impatient. Sun has a 43 percent gross margin, more or less, and companies like IBM can generate operating margins in the mid-teens, so Sun should be able to hit 10 percent, according to Reitzes. By his math, a 10 percent operating margin will allow Sun to generate about 30 cents per share in profit. This is very nice, in theory, but by Reitzes' calculations, Sun would have to layoff about 7,800 workers--or about 20 percent of its workforce--and cut research and development spending and gain lots of operational efficiencies to get to that 10 percent operating margin.

The SSG layoffs were also announced just as an article by a former top executive from Sun, John Shoemaker, was rising above the noise level because the article, among other things, criticizes Sun for not having made aggressive headcount reductions way back when in 2001. The article, called A Personal View of Sun Microsystems, was published in the December 2005 issue of Business Horizons, a publication of the Kelly School of Business at Indiana University; it is now making the rounds in electronic form, which is why we know about it.

Shoemaker was executive vice president of worldwide operations at Sun from 1990 to 1994 and executive vice president and general manager of Sun's Computer Systems group from 1995 to until he retired in 2002. He pulled no punches in laying the blame for Sun's current woes.

"Key executives at Sun met our greatest challenge when we were unable to convince our top decision maker to take quick action to implement a massive headcount reduction. In the fall of 2000, Silicon Valley experienced the greatest number of layoffs in its history. While other large technology firms like Cisco and Intel bit the bullet to save what they had and to protect the investments of shareholders, Sun's reduction-in-force actions were too little, too late," explained Shoemaker in the article. "This single failure to make a tough decision to reduce headcount at Sun was, I believe, the critical event that precipitated Sun's now infamous decline."