Pressure on Sun Rises as Earnings Continue Slide

The company must prove that recent operations and strategy shifts will pay off, or it risks eroding its stature further as a leading tech company, analysts say.

After posting another quarter of poor earnings, Sun Microsystems Inc. faces more pressure than ever from both shareholders and IT customers to prove that it can recover the position it once held as a prospering computer company, technology analysts said on Thursday.

While Sun has begun taking many of the right strategic and business operations steps to recover from its slump, analysts said the Santa Clara, Calif., company still must prove that such changes as greater support for x86-based systems and the settling of its long-standing feuds with Microsoft Corp. can improve its financial picture. On Thursday, the company posted a loss of $760 million for its fiscal third quarter on revenues of $2.65 billion.

"The bottom line is, wherever it comes from, Suns running out of time to prove that [it] can make money," said Gordon Haff, a senior analyst at Illuminata Inc., of Nashua, N.H. "They havent run out of time yet, but there is a recovery going on and others companies are doing better, but Sun is not."

Analysts agreed that Sun, despite growing financial losses, is far from bankruptcy or insolvency. The company has billions in cash and has taken steps to shore up business. The biggest was its $1.6 billion settlement of antitrust and patent issues with Microsoft, an agreement reached earlier this month that included plans for the two companies to collaborate on technology.

"Sun and its product lines will be around for a long time no matter what happens to Sun as a corporation," said Dana Gardner, a senior analyst at The Yankee Group, in Boston. "Sun might have to shrink and reconstitute itself, but theres not too much risk of it going away."

/zimages/2/28571.gifClick here to read an interview with Sun President and Chief Operating Officer Jonathan Schwartz about the Microsoft deal.

To Gardner, Suns decision to work with Microsoft could allow the two companies to battle the momentum of the Linux operating system, particularly as it gains ground in the same enterprise data centers where Sun wants its Solaris operating system. He expects Sun and Microsoft to work together on more streamlined version of Solaris and Windows for the data center to thwart Linux.

"I see a lot of signs that Sun is being bold in its thinking and addressing its structural issues and exploiting the changing and dynamic IT landscape," he said.

Sun has not stayed away from management shake-ups. As part of its earnings news, it reshuffled top management that are reporting to Jonathan Schwartz, the right-hand man of chairman and CEO Scott McNealy, who was promoted to president and chief operating officer earlier in April. One of the executives leaving Sun is Neil Knox, executive vice president of volume systems products, who had led much of Suns efforts into supporting systems running x86 processors from Intel Corp. and Advanced Micro Devices Inc.

/zimages/2/28571.gifTo read more about Suns work with AMD, click here.

Chief Technology Officer John Fowler will take over the part of the lower-end server business that uses x86 processors. While Fowler is well-suited to take on the role, the shift still could cause some disruptions, Haff said.

"By all appearances (Knox) has done a very good job for them," Haff said. "I see Knoxs departure as a significant negative."

Along with the management changes, the other major restructuring came from Suns decision to shift its UltraSPARC roadmap, said Jean Bozman, an IDC research vice president.

Sun plans to cancel development of the UltraSPARC V processor and jump to a new technology called "chip-level multithreading" following next years planned launch of UltraSPARC IV+, Bozman said. The change in chip plans was a likely casualty of the need to cut development projects.

"In the end it was a decision about how many projects you can run and still restructure company and reduce overhead and R&D costs," Bozman said.

/zimages/2/28571.gifRead more here about Suns plans for UltraSPARC.

For enterprise IT managers, Suns continued losses and major shift do cause pause when they are considering whether to start new relationships with the vendor, Haff said. Sun needs to show recovering financial results within the next fiscal year, or even sooner, he said. Suns fiscal year ends on June 30.

Shares of Sun stock on Thursday close down 3 percent at $4.42 per share. Gardner said the biggest impact of Suns sustained financial doldrums could be the outcome of a continued drop in its stock price.

"If the stock goes down quite a bit more, then it becomes a takeover target," he said.

And a potential suitor could shake things up even more.

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