The economic downturn might be pushing Sun Microsystems Inc., one of the storied names in computing, to the brink of extinction.
The company’s servers and software helped stimulate the Internet boom, and its engineering acumen is revered. But Sun never fully recovered from the previous financial crisis — the dot-com meltdown — and it has been steamrolled by big shifts in the way businesses buy their back-end computers.
Now Santa Clara, Calif.-based Sun plans to slash up to 6,000 jobs, or 18 percent of its global work force, as it scrambles to cut costs to offset a devastating slump in sales of its high-end servers. Sales of those machines fell 27 percent in the latest quarter as banks and other big customers went under or couldn’t get loans to buy the servers.
“These are hard but necessary changes,” Jonathan Schwartz, Sun’s chief executive, said in an interview Friday as he disclosed the cuts. They sent Sun shares up 4 cents, or 1 percent, to close at $4.12.
Sun also said its software chief, Rich Green, has resigned, as the company splits its software division into three new business groups.
One will handle Sun’s Java programming language — a key ingredient for many Web sites — and open-source database offerings. Open-source software is free software for which Sun sells support services. Another will be responsible for Sun’s Solaris operating system, which is used to run servers. The third will focus on developing programs for “cloud computing” services delivered over the Internet.
Sun’s extreme restructuring is what many investors were calling for. It follows three other rounds of big layoffs in the past three years in which nearly 7,000 jobs were axed. Analysts say it gives Sun breathing room to improve its margins and try to return to profitability.
It might not ultimately be enough, though, to preserve Sun as the company is currently structured if losses keep mounting, renewing speculation about a possible spinoff or sale. Fujitsu Ltd., Hewlett-Packard Co., IBM Corp. or Dell Inc. are all potential suitors.
“They still have strong cash on the balance sheet, and they’re still generating free cash flow, so they’re not dead yet, but the patient is definitely on the respirator,” said Rick Hanna, an equity analyst with Morningstar Inc. “I can’t imagine for a second the board would be satisfied with Sun’s current performance. ... What’s happening with Sun at this point is figuring out how to maximize what’s left.”
Sun says it is not planning any spinoff or sale. It argues the cuts are needed to keep Sun competitive in a depressed economy that has also trimmed the sails of far healthier Silicon Valley companies, including Intel Corp. and Cisco Systems Inc.
In particular, Schwartz said restructuring the software division will help Sun focus on areas where it has seen the most growth. Open-source software is in high demand because of tightened spending budgets, he said.
Sun’s challenge is to build up that side of the business enough to compensate for severe declines in sales of its most expensive and profitable servers. The strategy hasn’t paid off to investors’ satisfaction yet.
Friday’s moves “will definitely position the company for a return to profitability, but it’s still probably a year away,” said Brent Bracelin, an analyst with Pacific Crest Securities.
Any breakup or sale of Sun would be hugely humbling for a company that during the Internet bubble boasted its machines “put the dot in dot-com.”
Its image was shaped by the trash-talking co-founder and former CEO, Scott McNealy. He relentlessly mocked Sun’s rivals, especially Microsoft Corp. and Intel Corp., claiming that Sun’s own server operating system and server chips were superior. McNealy once referred to Microsoft’s Steve Ballmer and Bill Gates as “Ballmer and Butthead.”
Sun earned its stripes, though, with a bold vision of networked computing. Advanced communications technologies built into its software and servers made Sun an early pioneer of Internet-ready machines, and the dot-com boom fueled tremendous growth. At the height of the bubble, Sun’s stock price, adjusting for splits since then, topped $250 per share.
This decade has seen it all unravel. Sun was late to latch onto a shift away from proprietary hardware and software, as the server industry warmed to free software and cheaper microprocessors based on a standard design.
As Sun found its customer base dwindling it has had to shift its strategy, and even has forged partnerships with Intel and Microsoft. The latest figures from analyst firm IDC show Sun with 11.2 percent of the overall server market, way below No. 1 IBM, which holds 33.2 percent, followed by HP and Dell.
Sun’s shares have fallen so far now that its market value Friday was a bit less than the cash the company had on hand as of Sept. 30 — $3.1 billion. That means investors essentially believe everything else in the company is worthless.
Some analysts argue, though, that talk about Sun’s demise is overheated. The company’s obituary has been written many times, and Sun has survived with innovative products borne from a heavy focus on research and development. Sun spent $1.8 billion on R&D last year — 13 percent of total sales. By comparison, IBM spent $6.2 billion, 6 percent of its sales.
“Every management team should have their price,” said Shannon Cross, an analyst at Cross Research. “But I think management is trying to fix the company rather than sell it.”
Cross noted that Sun enjoys healthy gross profit margins, which means it is controlling the company’s manufacturing expenses well. Other expenses, including research and development, wind up dragging Sun’s overall results into negative territory.
Sun said the job cuts will touch 5,000 to 6,000 of its 33,000 employees over the next year. The cuts should save an estimated $700 million to $800 million annually.
Sun expects charges of $500 million to $600 million spread out over the next 12 months to pay severance and other restructuring costs.
Now Sun needs to make sure the cuts aren’t too close to the bone and don’t hinder future innovations.
“They bought themselves some time,” Cross said, “to figure out what the next steps are.”