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Sun Microsystems Inc. on Thursday announced a sweeping corporate reorganization of its business units in reporting a loss for its fiscal third quarter.
Sun, based in Santa Clara, Calif., said it would rearrange its business units to better manage its cost structures and “drive efficiencies,” a common refrain at most technology companies. But two key executives have left the company, and a third remains in limbo pending his own evaluation of his role at Sun, executives said.
In other news, Sun said it has formally completed its acquisition of Kealia Inc.
Sun reported a loss of $760 million for the third quarter on revenues of $2.65 billion, a year-over-year revenue decline of 5.0 percent from a year ago, when the company reported a slight $5 million profit. The loss includes charges of $500 million for the restructuring, a change in tax valuation allowance and a slight $3 million gain on investments.
Sun said April 2 that it would report a loss between $750 million and $810 million on revenues of about $2.65 billion, while also naming Jonathan Schwartz, formerly Suns software chief, to his new post as president and chief operating officer.
In his new position, Schwartz said Thursday that he would consolidate Suns microprocessors, enterprise systems and SPARC-based volume systems initiatives. They will be unified under the Throughput Systems group, led by executive vice president David W. Yen, who is responsible for driving Suns Throughput Computing and Throughput Networking initiatives.
Last week, Sun said it would cancel the “Millennium” and “Gemini” cores, which was interpreted as a cancellation of the UltraSPARC V line.
Systems using processors from Intel and AMD will be combined under the Network Systems group and will be led by John Fowler, who will hold dual roles as Network Systems acting executive vice president and as lead technology officer for Schwartz.
The Network Systems organization will “focus on delivering low-cost, horizontally scaled systems with off-the-shelf components that leverage industry economics,” Sun said. Both Yen and Fowler will report to Schwartz.
Mark Tolliver, chief marketing and strategy officer, and Neil Knox, executive vice president of volume systems products, have left the company after the restructuring. Clark Masters, executive vice president of systems products, is in limbo pending his own evaluation of his role within Sun, executives said.
In their stead, Sun named Anil Gadre, 47, as interim chief marketing officer; and Brian Sutphin, 49, as vice president of corporate development. Both will report to Schwartz.
Next Page: Improving Suns cost structure is a priority, McNealy says.
Improving Cost Structure
In terms of products, chief executive Scott McNealy on Thursday said the companys portfolio is “stronger now than in the past 10 years.”
“We feel very good about it, and now is the time to go address [our] cost structure,” he said. The company wants to improve the efficiency of its supply chain in a bid to return to profitability, he said in a conference call.
McNealy, Schwartz and other executives did not discuss the restructuring during the call, leaving it to analyst Laura Conigliaro of The Goldman Sachs Group Inc. to ask about the shift. Schwartz said Sun is operating with “eyes wide open” to find the best executives to lead the new business units, adding that the best executives for the job would be found within Sun.
“Very, very few people have a new boss, and thats what really drives a disruption,” McNealy said.
In terms of the individual business units, server unit volumes grew 22 percent year-over-year. Sun shipped 193,901 CPUs during the fourth calendar quarter of 2003, according to IDC. Product revenues dipped slightly as a percentage of overall revenue to 65 percent, or $1.71 billion; services revenues made up the remainder, or $940 million.
The UltraSPARC IV chip did not ship until week 13 of the quarter and therefore had a reduced impact on product revenues, said Steve McGowan, the companys chief financial officer.
McNealy also said that Sun would begin to “tape out” a 32-thread microprocessor in 60 to 90 days. Sun spokeswoman Sabrina Guttman said McNealys comments referred to the “Rock” processor that Sun is pinning its hopes on after terminating the “Millennium” and “Gemini” projects. Sales of computer-related products dipped 13 percent to $1.36 billion, while the attach rate for Suns remaining storage products grew to 25.3 percent, the company said.
In software, Sun added 81,400 subscribers for a total of 174,000 to its Java Enterprise System program, which offers companies licensing fees of $100 per employee per year. According to McNealy, customers regard this as “a steal,” although Sun requires them to also buy associated Sun hardware and services. Solaris 9 downloads reached just under 25,000 in the fiscal third quarter, he said.
Next Page: McNealy touts interoperability of Microsoft deal.
Interoperability with Microsoft
McNealy also touted the companys recent settlement with Microsoft Corp., which will add $1.95 billion in cash to Suns coffers: $700 million to resolve antitrust issues, $900 million to resolve patent issues and $350 million in potential royalties, he said.
“Ive had a chance to talk to a lot of customers about this, and I cant find anybody whos upset about it,” McNealy said. “I cant think I will find someone that is unhappy.”
The agreement will allow Sun and Microsofts products to be interoperable. “The way I like to put it is that it allows each to be a second source to the other,” McNealy said, and to take each other into markets that both companies have never entered before, he said.
Members of Schwartzs new executive team also will include Mark Canepa, executive vice president of storage; Robyn Denholm, vice president of finance and corporate controller; Michael Dillon, senior vice president, general counsel and corporate secretary; John Loiacono, executive vice president of software; Bill MacGowan, senior vice president of human resources; Marissa Peterson, executive vice president of customer advocacy, network services and worldwide operations; and Robert Youngjohns, executive vice president of global sales operations.
Sun also announced that it has completed its acquisition of Kealia—a privately held company based in Palo Alto, Calif., co-founded and led by Sun co-founder Andy Bechtolsheim—in return for 20 million shares of stock. Kealia was established to develop advanced computer system design, and its expertise will be applied to Suns design team.
“As part of the acquisition, Sun plans to formally drop the Kealia name,” Sun said in a statement. “No one could pronounce it, anyway.”
Editors Note: This story was updated to include information and comments from Sun executives.
This story was updated at 10:37 AM PDT on Friday, April 16 to add Sun spokeswoman Sabrina Guttmans comments regarding the Sun Rock processor.