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Sun Sees Light After Layoffs, Earnings News

August 11, 2006
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Sun Microsystems may be emerging from its darkest days, as the computer maker trims its headcount and continues to announce new products.

Sun’s decision in May to cut 4,000 to 5,000 jobs—or 11 percent to 13 percent of its workforce—received a warm welcome from a number of analysts. But the firm erred by not trimming more jobs sooner, says Jonathan Eunice, an analyst at technology advisory firm Illuminata.

"There aren’t many examples of especially advantageous products that Sun has now that it needed thousands of additional folks to develop," he says. "It wasn’t any masterpiece of talent management to keep those folks on over the past five years, only to cut them now."

Sun spokeswoman Stephanie Hess counters that the firm’s investment in research and development in recent years has helped with its current product set. She also says new chief executive Jona­than Schwartz is "not going to hack his way to a higher stock price."

Sun, which took the dot-com bust on the chin, reported net losses for its fiscal years 2002 to 2006. Thanks partly to restructuring charges, Sun posted a net loss of $301 million for the quarter ended June 30. Revenue for the quarter rose 29 percent year-over-year to $3.8 billion.

Sun has been an innovative maverick in the computer world. Founded in 1982, the company came to dominate a class of powerful computers called workstations. And Sun machines helped power the rise of the Internet in the late 1990s. But its culture of engineering excellence didn’t sync well with the ensuing era of belt-tightening, says Clay Ryder, president of technology consulting firm the Sageza Group.

As the economy contracted around 2001, companies began turning to lower-cost or free computing products such as the Linux operating system, he says. "Think of Sun as being a gourmet chef when most people are willing to eat at Togo’s or McDonald’s," Ryder says.

Schwartz, who had been Sun’s chief operating officer, took over as CEO in April from Scott McNealy, one of the company’s co-founders. McNealy had a reputation, not wholly deserved, for holding on to employees despite financial losses. Sun’s headcount dropped by 12,000 from 2001 and 2005 because of attrition and job cuts.

The recent layoffs, part of a plan to return to steady profits, were less than Wall Street had expected. "We had projected a slightly higher 15 percent reduction in headcount," Merrill Lynch stock analyst Richard Farmer wrote in a research note last month. But, he wrote, "we still see this action as a meaningful proof point of new management’s commitment to profitability."

Layoffs have come under increased scrutiny recently. Louis Uchitelle, author of The Disposable American, says companies underestimate the damage layoffs do to morale among remaining workers.

Eunice, however, says Sun’s morale suffered as employees saw the company floundering in red ink.

On the other hand, he gives Sun credit for turning things around beginning early this year. That’s partly due to new chips for high-end computer servers—machines used for tasks such as logging bank transactions. Sun is "looking better these days," he says.

In July, Sun unveiled a new product in the category of thin "blade" servers, designed to save space and energy.

Not everyone thinks the clouds have cleared for Sun. Hugh Mai, a stock analyst with First Albany Capital, said in a recent report that Sun’s long-term goal of 10 percent operating profit margins may require additional cost-cutting.

Ryder says Sun could manage a recovery similar to IBM’s. Big Blue sagged in the early 1990s but reshaped itself as a services-oriented company.

Key for Sun and its leaner workforce will be creating a new identity, Ryder says, just as the firm did during the Internet boom. "They really need another way to reinvent themselves."

Ed Frauenheim

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