Sun Books a Small Loss on a Tiny Revenue Decline, Cuts Jobs

Published: May 1, 2008

by Timothy Prickett Morgan

The financial holding pattern with server and software maker Sun Microsystems continued in the fiscal third quarter, with the company reporting a relatively insignificant loss on a fractionally small decline in sales compared to the year-ago period. Sun is one of the few IT vendors that has to talk in four significant digits to express the changes in its quarterly results--something that certainly was not necessary in the heyday of the dot-com boom when Sun's sales were growing at 20 percent.

For the third quarter of fiscal 2008 ended on March 30, Sun reported sales of $3.266 billion, down 0.5 percent from the third quarter of fiscal 2007, but sales in the same quarter in fiscal 2006 would have rounded to the same level just set now and were, just to remind you that Sun can show growth, up 21 percent to $3.177 billion. To be sure, and fair, the third quarter is never a great one for Sun, just like the first three months of the calendar year are weak for most IT players unless they have a particularly strong product cycle underway. Anyway, in the third quarter of fiscal 2008, Sun had a loss of $34 million, or 4 cents per share, compared to a profit of $67 million a year ago, or 7 cents a share.

For the nine months in fiscal 2008, Sun posted sales of $6.232 billion, down 0.7 percent, but has managed to pull in $315 million in net earnings, more than double what it did in the first nine months of fiscal 2007.

The company blamed the economy in the United States for its weak sales, and took some charges relating to its $1 billion acquisition of open source database maker MySQL, which amounted to 4 cents per share, which means had Sun not bought MySQL, its revenues would have been down a tiny further but it could have possibly broken even. All rounding errors in the numbers, really. The fact remains that Sun is not showing the kind of growth that its IT rivals IBM and Hewlett-Packard in roughly the same calendar period and in the same difficult markets.

Jonathan Schwartz, Sun's president and chief executive officer, remained Sun's most vocal cheerleader in a statement the company put out accompanying its financial results. "The U.S. economy presented Sun with significant challenges in the third quarter, masking our progress in developing nations and economies across the world," Schwartz explained. "With double-digit, year-over-year growth in India and Brazil, and triple digit billings year-over-year growth in our energy efficient, Solaris-based Chip Multi-Threading (CMT) systems, Sun made considerable progress during the quarter. We continue to invest in the future created by open alternatives to proprietary technologies, best exemplified by the acquisition of MySQL. The world is moving to open source innovation, and Sun continues to lead that revolution."

The world may be moving to open source, but it sure seems hard to make a buck--or even a euro, yuan, yen, looney, or krona these days off such solutions.

Schwartz said on a conference call with Wall Street analysts that he was disappointed with the quarter, and admitted that the numbers were lower than Sun itself had expected because of softness in government sales in the United States as well as among retailers and telecommunications firms, which in some cases deferred purchases. Mike Lehman, Sun's chief financial officer, said that Sun missed its own targets for its Computer Systems unit and for its Storage unit by in excess of $100 million each. Oddly enough, Schwartz said that sales in the financial services industry in the Northeast of the United States were not where the weakness was in the quarter, despite all the headlines.

During the quarter, Sun had $2.003 billion in product sales, down 2.8 percent, and services sales of $1.263 billion, up 3.3 percent. Computer Systems sales fell by 1.8 percent to $1.473 billion, with high-end server sales, particularly in the United States, being off. Storage product sales fell by 5.4 percent to $530 million, with high-end tape arrays and high-end disk arrays being the biggest decliners. Ironically, in the quarter, Sun's total server units rose by 6 percent to something around 80,000 units (Sun's graphs don't show absolute numbers), and X64 "Galaxy" server shipments rising by 26 percent to something close to 33,000 units. That means that Sparc based server volumes fell by around 5 percent to around 47,000 units, and that is with "Niagara" Sparc T1 and T2 billings (not revenues, but billings) pushing $300 million in the quarter and up over 100 percent year-on-year. On the services front, support services accounted for $961 million, up 1.2 percent, and professional and educational services had sales of $302 million, up 10.6 percent.

On a geographical basis, sales in the United States fell by 10 percent to $1.143 billion. While the International Americas region was up 15 percent, the region only accounts for $229 billion in sales. Europe, the Middle East, and Africa accounted for more sales than in the United States (which also happened in the second fiscal quarter), hitting $1.274 billion in the quarter; the Asia/Pacific region had $620 million in sales. Schwartz said that despite the difficulties in the United States, Sun's sales were up 30 percent in India, up 20 percent in Brazil, and up 18 percent in the Middle East and Africa, and added that Sun had sales growth in 12 of the 16 regions in which Sun operates.

After Schwartz took the helm from Sun founder Scott McNealy in early 2004 and spent some time getting his hands wrapped around the company's financials with his office mate, Lehman, the company put a stake in the ground and said that it had hoped to have an operating margin as it exited fiscal 2009 of 10 percent. Today, based on revised expectations for sales in the United States and a mix shift to smaller servers and storage arrays in some cases, Sun is now revising that down to a 7 percent operating margin. Lehman said that looking ahead to the fourth quarter of fiscal 2008, Sun expected revenues to be flat, but for the company to be "solidly profitable."

Lehman also said that because of the MySQL and other minor acquisitions, the company's headcount has risen by 1,100; Sun also added 300 sales people and a number of other people in its own IT operations. To get costs down to being smaller than revenues, Lehman announced that Sun would be taking a charge of between $120 million and $130 million to remove between 1,500 and 2,500 people from its payroll, which is around 33,350 people these days.

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