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Sun to Cut 3,300 Jobs Despite Deal

Posted on: Saturday, 3 April 2004, 06:00 CST

Sun Microsystems Inc. said yesterday that it will eliminate thousands of jobs because of huge losses, even as it propped up its ailing business with a $1.6 billion cash infusion and partnership agreement with arch rival Microsoft Corp.

Coming off a quarter in which it says it lost $750 million to $810 million, Sun plans to cut 3,300 jobs, or about 9 percent of its workforce. The losses it disclosed yesterday, and its quarterly revenue of about $2.65 billion, were worse than Wall Street analysts and investors had been expecting.

The company's announcement of big losses, on top of two years of financial struggles, made it clear that Sun has yet to turn the corner, unlike its competitors.

"Laying off 10 percent of your workforce and missing your targets for your quarterly financial expectations is a pretty dramatic problem at this point in the business cycle where we are seeing an uptick in IT spending," said Dana Gardner, a senior analyst at the Yankee Group. "That would probably indicate the need for a dramatic change in strategy. That is what we have seen with their pact with Microsoft."

Sun performed extremely well during the dot-com boom, as Internet firms with money bought Sun's high-powered servers and workstations. Its sales soared to $5 billion a quarter. But Sun's rise, based on a smaller customer base than those of many of its competitors, also set the stage for its plunge over the past two years, as spending declined and the company found itself unable to compete against lower-cost providers using the Linux operating system.

Sun's competitors include Hewlett-Packard Co. and International Business Machines Corp., which has profited immensely from professional services and consulting while selling lower-cost systems, and Dell Inc., which has moved beyond low-cost personal computers into servers. Sun generally stayed the course with its higher-cost servers that run on its Unix operating system.

The news about Sun's continuing losses comes one month after Standard & Poor's Corp. cut the company's debt rating from investment grade to "junk-bond" status, citing the uncertainty over the firm's ability to return to profitability.

Until yesterday, Sun chief executive Scott G. McNealy had criticized Microsoft, branding it a monopolist and urging the European Union to seek stiff sanctions against the company for its alleged anticompetitive behavior. But with Sun's prospects continuing to deteriorate, McNealy has dropped the rhetoric and gained a new partner.

While Sun and Microsoft will continue to compete, as part of their lawsuit settlement they agreed to make the servers they sell to major corporations more compatible. In effect, as with many major technology firms, Sun and Microsoft would be both competitors and partners, a shift that could benefit both companies as they compete against the common threat posed by open-architecture operating systems, notably Linux.

While McNealy remains chairman and chief executive, he relinquished one of his titles yesterday as the company named Jonathan Schwartz president and chief operating officer. Schwartz had been executive vice president with responsibility for software.

"This gives even more cultural clout within the Sun organization to software. So in a sense it is the software tail that is wagging the hardware dog at Sun. This is where the future is," Gardner said. "Heavy emphasis on software, and the quality of software, is going to allow them to win or not, in this battle for the enterprise accounts."

Sun stock closed yesterday at $5.06 a share, up 87 cents. Wall Street analysts said they were pleased to see major cost reductions, given McNealy's resistance to cutting jobs, as well as the prospect that sales might improve due to the cooperation with Microsoft.

"These actions are confirmation of our commitment to continue reducing our cost structure, and with execution on our technology and sales strategy, position the company to achieve our financial goals in fiscal year 2005," said Stephen T. McGowan, Sun's chief financial officer.

Jean Bozman, an analyst with IDC who has followed Sun for many years, called the pact with Microsoft a "watershed event," though others cautioned that partnerships with Microsoft do not always turn out to be as profitable as executives hope when they cut the deals.

She also praised Sun's cost cutting, saying the expensive infrastructure it built up during the dot-com boom could no longer be supported.

"They have to continue to reduce overhead in order to become profitable," Bozman said.

While the cash from Microsoft is a surefire boost for Sun, Bozman said it remains to seen how simple Sun and Microsoft make it for corporate customers to fluidly link Unix-based and Windows-based computer systems. But there is no doubt, she said, that major corporate customers who rely upon both vendors have been eager to see such a partnership.

Reported By TechNews.com, http://www.TechNews.com

(20040403/WIRES /)

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