Sun Microsystems Wrestles with Restructuring, Economy

Sun Microsystems finds a recession in the United States and an overall rough global economy translated into steadier low-end software and storage sales in its fiscal 2009 second quarter, while numbers for higher-end systems such as those based on the UltraSPARC processor suffered. Sun also recently announced a series of layoffs that began in January. However, last quarter's restructuring announcement may translate into cost savings down the road.

Sun Microsystems' results for the second quarter of fiscal 2009, announced Jan. 27, show the company taking a beating in many categories, with revenues decreasing 10.9 percent year over year from 2008.

Perhaps unsurprisingly, customers have reduced spending on proprietary high-end systems such as servers based on the company's UltraSPARC processors to embrace lower-end software and storage alternatives, such as its Open Storage offerings.

Nonetheless, CEO Jonathan Schwartz said in a conference call Jan. 27, "Results for Q2 were in line with what we expected." He cited "double-digit" revenue increase for Sun's growth categories, including CMT (chip multithreading technology) and Open Storage: "Growth categories account for one-third of Sun's product billings."

Billings for the company's "Niagara" server series rose 30 percent year-over-year, and Sun plans, Schwartz added, "to broaden our Niagara offerings in both blade and rack forms." Billings for Open Storage products grew 21 percent.

When asked whether he thought the UltraSPARC business would eventually revive, despite the economy, Schwartz responded, "It really depends on the customers." He indicated that cross-selling and support services could sustain the higher end of the server business despite the recession.

While Sun's revenue in the quarter increased 7.7 percent to $3.2 billion, net loss (on a GAAP basis) was $209 million, or 28 cents per share.

This includes a $222 million restructuring charge in November 2008, when, on the heels of a $1.68 billion third-quarter loss (much of it due to a one-time $1.445 billion impairment expense tied to the $4.1 billion acquisition of StorageTek in 2005), Sun announced that 18 percent of its global work force would be laid off.

At the time, the company also announced its reorganization into three divisions-a move that could potentially save it between $700 and $800 million a year, with most of the benefit to be realized in fiscal 2010. Sun began additional layoffs in January 2009, which could cut costs further.

The three new business units would be Systems Platform (encompassing the open-source Solaris operating system and other management software), Cloud Computing and Developer Platforms (the new home for Web-based technologies), and Application Platform Software (MySQL open-source database products and Java software).

"The meltdown in the banking and financial sectors has really whacked some of Sun's traditional customer base," Charles King, an analyst with Pund-IT Research, said in an interview. "When we saw IT vendor revenues starting to erode last year, Sun was ahead of the curve because their customers were hitting the wall before anyone else's was. Their Unix-based platforms are losing market share. At the higher end, part of the problem is that they're entering the X86-64 market, but they entered in a less cohesive manner."

And when it comes to rebounding in the medium to long term, some analysts say Sun may have to alter not only its corporate structure, but also its culture.

"Over the past few years, Sun has become more reactive: They jumped into the X86 market behind Dell; they launched emerging markets way behind IBM and HP," said Josh Farina, an analyst with Technology Business Research, who cites Sun as still "reliable" in the hardware category.

"They need to become a leader in their core strengths," Farina said.