Sun's revenue drops 11 per cent in Q2

Sun Microsystems reported an 11 per cent drop in revenue for the December quarter but managed to beat the modest expectations of financial analysts.

Revenue for the quarter, the second of Sun's fiscal year, was $US3.22 billion, down from $3.62 billion in the same quarter a year earlier, Sun announced Tuesday. That was slightly ahead of the consensus analyst estimate of $3.16 billion, according to Thomson Reuters.

The net loss for the quarter was $209 million, or $0.28 per share, which compares to a net profit of $260 million, or $0.31 per share, for its second quarter of fiscal 2008. The loss per share includes $222 million in restructuring charges, related mostly to the mass workforce reductions that Sun announced in November.

Excluding those and other charges, Sun would have reported a profit for the quarter of $114 million, or $0.15 per share, the company said. Analysts had forecast a loss before charges of $0.10 per share, so the profit was an unexpected surprise.

Sun has been battling to grow its revenue for several quarters as customers cut back spending on its high-end Sparc servers in favor of industry-standard x86-type machines. Some of Sun's largest customers are big financial firms, so it has been hit particularly hard by the turmoil on Wall Street.

The company announced a plan in November to lay off up to 18 per cent of its workforce, or 5000 to 6000 employees, as part of a restructuring designed to save it $700 million to $800 million per year. The move followed Sun's report of a $1.68 billion loss for the September quarter.

Concerns about the economy led customers to delay higher-end system purchases during the last quarter, so sales were down compared to last year for Sparc enterprise servers as well as the software and services normally sold with them, CEO Jonathan Schwartz said during a conference call Tuesday.

Overall systems revenue declined 14 per cent year over year to $1.37 billion, CFO Michael Lehman said. Storage revenue fell 13 per cent to $570 million, and services revenue declined 6.2 per cent to $1.28 billion, he said.

Schwartz argued that those numbers tell only part of the story. The CEO likes to view Sun's business in two parts - "traditional" products like its Sparc Unix servers, where sales are declining, and "growth" products like its open-source software and multi-threaded Niagara servers, where business is growing.

Niagara sales increased 31 per cent year over year and are now selling at an "annual run rate" of about $1.4 billion, Schwartz said, using a figure arrived at by extrapolating from the sales in the first two quarters of the year. Its x86 server business increased 11 per cent year over year, while sales of its newer Open Storage products increased 21 per cent. Software was a "shining light" in the quarter, Schwartz said, increasing 21 per cent for an annual run rate of $600 million.

Those growth products accounted for about one-third of Sun's business during the quarter, up from 23 per cent a year earlier, Schwartz said. Viewed from that perspective Sun's business looks more healthy, but its challenge is to grow those businesses faster than its traditional businesses are declining, something that is not happening yet.

Schwartz was optimistic as always. He argued that the economic downturn is compelling more companies to look at Sun's open-source software and Open Storage products to keep costs lower. Its new Amber Road storage gear, which combines open-source software with performance-boosting flash memory, is attracting particular interest, according to Schwartz.

"In the midst of this economic downturn, discussions related to free and open-source software have substantially heated up," Schwartz said. "This is no longer a peripheral discussion with CIOs. Cost reduction related to open-source adoption has become a focal point for decision makers across the world."

Sun has made software a big focus of its strategy since Schwartz replaced Scott McNealy as CEO in April 2006. Almost all of its software is now available under an open-source license, and early last year it bought the open-source database leader MySQL for about $1 billion.

The idea is to get more companies using Sun products, even if the software is free to acquire, with the idea that Sun will be able to upsell those customers to support contracts and Sun hardware. That strategy has taken time, however, and shareholders have been getting impatient for a faster turnaround.

Sun's shares on the Nasdaq closed at $3.99 Tuesday, well off of their 52-week high of $18.03. Investors were encouraged by the results, however, pushing the stock 5 per cent higher in after-hours trading.

Tags Sun Microsystems

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James Niccolai

IDG News Service

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