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Sun’s Quarter Sucked; Layoffs Planned

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Sun’s back in the red again after five profitable quarter and five years in the red after the dot.com bust. 

The March quarter turned sour on it, starting, it said, with the first week in March when the channel stared reporting a drop in sales, a trend that spread to its end-user business as the month progressed. 

It blamed the US economy, where business was down 10%, some of it traceable to smaller businesses and the government, it said. (Former SUN CEO Scott McNealy runs Sun Federal.) 

It gets 40% of its revenues from the US and the gains it made in 12 out of 16 geographies weren’t enough to make up for the “significant” shortfall. 

The problem, however, may be more Sun-specific than the company allows considering that sales have been dropping for quarters now. 

It thinks this quarter may not be as bad, maybe flat with last year, but “solidly profitability,” however, things are bad enough that it’s going to restructure again – and can somewhere between 1,500 and 2,500 people to lower its operating expenses by $100 million-$150 million a year. 

It’s also abandoning its dearly held promise of seeing a 10% operating margin next fiscal year, which starts in June. Now it’s looking at 7%-8% and it’s going to cut R&D. 

Sun’s losses surprised Wall Street. It was thinking the company would clear 18 cents on revenues of $3.38 billion. Instead it showed up down four cents, or $34 million, on revenues of $3.27 billion, down 0.5%. Its stock sunk over 14.5% in after-hours trading. 

It earned seven cents or $67 million a year ago. 

MySQL, its billion-dollar open source acquisition, cost it four cents in the quarter, an impact Sun expects will repeat this quarter. Without MySQL it would have at least broken even, but it’s delighted with its purchase and the market’s response to it. Integration proceeds apace, it said. 

On the sales side what it described as high-end systems were off $100 million. Ditto high-end storage, tape and libraries. 

CFO Michael Lehman said Sun didn’t lose the business to competitors and deals were still active he just didn’t think that a lot of would close this quarter. In fact, he suggested, a lot may simply vanish. 

Sun also paid more taxes than last year: $52 million versus a $3 million tax benefit. 

Its gross margin was 44.9%, up four-tenths of a point. 

It claimed double-digit growth in India and Brazil, and triple-digit billings growth in its Niagara systems. It was also happy with its blades business. 

Sun expects to take a $130 million-$220 million charge this quarter to cover the layoffs, which Lehman described as a “reduction in force” that would inside and outside the states. 

Sun’s payroll is up 1,100 people including 600 from its acquisition of MySQL and the free desktop virtualization house, innotek and 300 added in emerging markets.

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