1 October 2003 Shares in Sun Microsystems tumbled 14% yesterday after the systems giant posted an unexpected $1 billion charge for its last quarter and warned that it expected yet another big loss in its current quarter.
On a day described by Aberdeen Group analyst Peter Kastner as “thoroughly depressing” for Sun, credit agencies rushed to downgrade the company’s debt.
Meanwhile, financial analysts called for unprecedented cuts to be made to Sun’s overheads after the systems vendor revealed that it was on course for a net loss of between $230 million and $325 million in its fiscal first quarter.
A mass sell-off of Sun shares was also triggered by the news that it had taken a tax charge in its fiscal fourth quarter that transformed a profit of $12 million into a loss of almost $1 billion.
Sun, which has suffered nine consecutive quarters of revenue falls, is regarded by analysts as the biggest casualty of the rise of commodity servers running Linux on Intel microprocessors.
“We believe the deteriorating outlook reflects a sustained industry shift away from Unix systems to industry standard servers, particularly Linux-based, and that this shift would accelerate in the early stages of a recovery,” says JP Morgan analyst Bill Shope.
While Sun has tentatively begun to support Linux, sales have so far been weak, according to Toni Sacconaghi, an analyst at investment bank Sanford Bernstein.
Sun’s business model is still focused on a huge research and development (R&D) operation primarily responsible for improvements to its Unix-based Solaris operating system and its reduced instruction set computer (RISC) based UltraSparc microprocessor designs.
Sun spends 16% of its revenue on R&D, compared to just 1% at Dell, 6% at IBM and 6% at Hewlett-Packard (HP). Sun’s selling, general and administrative (SG&A) expenses amount to 29% of revenues, compared to about 13% at IBM and HP.
While Sun is in the process of laying off a further 1,000 of its staff, some analysts want the cuts to be deeper — more in the range of 7,000 to 8,000, representing almost a quarter of Sun’s current workforce.