Sun Lays Off Up to 5,000 Employees, Banks on Revenue Rise
Published: June 8, 2006
by Timothy Prickett Morgan
Sun Microsystems' new chief executive officer, Jonathan Schwartz, said that he would be moving pretty fast to do an in-depth analysis of what the company should focus on and how the company should be restructured for growth and profitability, and while The Unix Guardian was on hiatus, Sun announced that it would be laying off up to 5,000 of its employees to cut costs and get profitable as quickly as it can. And for the first time in a long time, Sun is making revenue and profit forecasts for the future.
In late April, when McNealy stepped down as CEO and Schwartz took the reins, he and returning chief financial officer, Michael Lehman, went through a top-to-bottom review of Sun's business, looking to sharpen its focus and trim costs. Sun has been under pressure from Wall Street to cut thousands of employees from its 37,500-strong payroll and make other changes, like closing down office space, to trim costs and get back into the black consistently and quantitatively. To that end, Schwartz announced on May 31, when many of us were still on the Memorial Day holiday (a traditional time to make announcements), that it would cut from 4,000 to 5,000 employees from the payroll within the next six months, amounting to an 11 to 13 percent reduction in headcount. Sun also said that it would be selling its Newark, California, campus and existing leased facilities in its Sunnyvale, California. The two remaining Sun offices in California's Silicon Valley will be in Santa Clara and Menlo Park. The firings and office closings will cause Sun to take restructuring charges ranging from $340 million to $500 million (most of which will hit in the current fourth quarter of fiscal 2006), and will result in annual cost savings of $480 million to $590 million.
"At the outset, I know that these changes will be tough for many employees, but I am also convinced that they will yield a more valuable company for customers, shareholders, and our remaining employees--one that is leaner and more efficient as well as simpler to understand externally," explained Schwartz in a conference call with Wall Street analysts.
Schwartz explained that such actions in the past had made it possible for Sun to grow sales and profits, and made it clear that Sun would be more focused on creating products based on focused research and development--and he cited Solaris, Java, and the Sun Fire server platforms as key differentiating technologies that more future products would be based on. "Our industry is littered with companies that try to be all things to all people, and that's not Sun." He said that Sun will focus on the companies that see the Internet as their principle way to market, or a key differentiator. While this is consistent with Sun's long held credo of "the network is the computer," it is hard to see how that translates into any specific customer set, seeing as we are all hooked to the Internet these days and dependent on it. He singled out Java and the open source Solaris operating system as key areas where Sun would increase development efforts, saying that these areas will continue to define the largest revenue opportunities in the long term for the company; he added that Sun had cut R&D in other areas and would be eliminating management redundancies to cut costs as well.
As an example of the kind of future products Sun would roll out, Schwartz touted the forthcoming "Thumper" storage array, which is comprised of a two-socket Sun Fire server running Solaris and its ZFS file system, the Thumper array will pack 24 TB of disk capacity into a in a 4U rack-mounted chassis, and it is expected to be announced at the end of June. Sun's R&D will be focused on building solutions with as much Sun content as possible, but Schwartz also hinted that from now on, Sun will also go to third party suppliers for stuff and not reinvent wheels.
In a move that made Wall Street happy but somewhat perplexed, Schwartz said that he had a long-term goal of Sun delivering operating profits that were in the range of 10 percent of revenues. He did not say if that would be in fiscal 2008 or 2009, but he did say that it would not be in fiscal 2007, which starts on July 1. However, Schwartz did say that Sun was confident enough in the way the business was heading upward to predict that it would deliver an operating profit of around 4 percent of revenues in the fourth fiscal quarter of 2007, which will be ending just about a year from now. Sun expects revenues in fiscal 2007 to grow in the low to middle single digits (Wall Street is reckoning around $13.5 billion), for operating expenses to be in the range of $5.6 billion to $6 billion (not including restructuring charges), and for gross margins to be around 43 percent. Schwartz would not project where the bottom line would be in fiscal 2007, but he did say that he expected Sun to be cash flow positive. He also said that if Sun had to choose between top line growth and profitability, his team was focusing on the bottom line.
Sun still has $4.4 billion in cash and equivalents, even after shelling out $4.8 billion last year buying StorageTek. So Sun can ride out a few storms, should they come its way. But, to make its long-term profit forecasts, it is going to have to see a substantial increase in sales.
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