Sun's revenue drops 20 percent ahead of Oracle buy

The systems company reported its fourth loss in the past five quarters

Sun Microsystems reported a sharp drop in revenue for its third fiscal quarter, as the company battled uncertainty about its future along with the global recession.

Reports that Sun was up for sale surfaced in mid-March and analysts had speculated that the rumors would disrupt efforts to close deals at the end of the quarter, which closed March 29. The initial suitor was reportedly IBM, but in the end it was Oracle that said it had snapped up Sun two weeks ago, for US$7.4 billion.

Sun's revenue for the quarter was $2.61 billion, it announced Tuesday, down 20 percent from a year earlier and below the $2.86 billion that financial analysts had been expecting, according to Thomson Reuters. Sales of Sun's x86 servers, which had been a growing area for the company, declined for the first time.

Its net loss was $201 million, or $0.27 per share, wider than last year's loss of $34 million, or $0.04 per share. This year's figure included a restructuring charge of $46 million, related mostly to the 5,000 to 6,000 layoffs that Sun announced in November.

Sun executives made no comment on the quarter in the company's press release and the company did not hold its usual conference call to discuss the results, presumably because of the pending acquisition.

The company's financial performance has been uneven for the past several years, and lately it has struggled to increase sales or turn a profit. It has now posted losses for four of the past five quarters and its revenue has declined each time.

Sun counts several financial services companies among its largest customers and thus was hit earlier than most by the current recession. It had reportedly been seeking a buyer for several months until Oracle stepped in on April 20 and said it would buy the company. Prior to that it was said to have been close to a deal with IBM, but the talks broke down over price and possibly other terms.

Oracle was seen by some as an unlikely savior given its focus on software, and the deal raises questions about what Oracle plans to do with Sun's hardware business after the deal closes this summer. Some analysts expect Oracle to try to sell off Sun's server and chip businesses, while others say it could use them to build more high-end database appliances, along the lines of the Oracle Database Machine it designed with Hewlett-Packard last year.

Oracle has said it was most interested in Sun's Java and Solaris businesses. It also says it will act quickly to make Sun's businesses profitable, which analysts say could mean cutting as many as 10,000 jobs.

Some of Sun's key growth areas let it down during the quarter. Besides the drop in x86 shipments, billings from Sun's CMT (Chip Multithreading) Niagara servers, which had been selling well, increased by only 3 percent, the company said.

Total software billings increased by 28 percent from a year earlier, and its open storage products had a strong quarter. But Sun's core Sparc Server business was down, and total server shipments were off by 26 percent, Sun said.

"There were few product categories that had any success this past quarter," said Gartner analyst George Weiss. He attributed the poor results to the economy, the uncertainty caused by the acquisition, and competitors taking advantage of the uncertainty to target Sun customers.

"There will be a lot on Oracle's agenda to at least try to reverse the direction in some of these product categories," Weiss said.

Customers may not have a clear picture of how Oracle plans to integrate Sun's products, and which it will sell off, until six months to a year after the acquisition closes, Weiss noted.

He thinks Oracle will use Sun's hardware to build high-performance database and data-warehousing appliances that "bypass the generic server part of the market," he said. It's unclear yet whether it will do that with x86-type processors or the newer Niagara CMT chips.

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James Niccolai

IDG News Service
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