Sun cuts Q1 revenue forecast; slashes workforce

Citing a global economic downturn and the negative effects of the Sept. 11 terrorists attacks on the U.S., Sun Microsystems announced Friday that its first-quarter earnings would come in lower than expected, and that it is slashing its workforce by 9 percent.

Sun predicted that it would report revenue of between US$2.7 billion and $2.9 billion for the quarter ended Sept. 30. The company had already said at a mid-quarter conference call that it did not expect to reach the $3.7 billion revenue target it had set earlier.

In the preliminary results released Friday, the company said that it expects earnings per diluted common share on an operational basis to come in at a loss of between $0.05 and $0.07. A Thompson Financial/First Call survey of analysts predicted an earnings per share loss of $0.04 for the quarter.

In addition to the worldwide economic slowdown affecting sales, company representatives pinned some of their lackluster first-quarter results on the deadly Sept. 11 terrorists attacks in the U.S.

"Our business nearly ground to a halt in the two weeks following that tragic date," Sun Executive Vice President and Chief Financial Officer (CFO) Michael Lehman said during a conference call with analysts Friday. Lehman said that Sun traditionally gets a wealth of its orders during the last month of the quarter. The attacks, which had a large impact on telecommunication and financial services companies, many of which are Sun customers, seriously dampened the company's sales, he said.

The company also said that it is introducing a program to reduce its workforce by approximately 9 percent, or roughly 3,900 employees, as well as consolidate excess facilities. Due to these reductions, Sun will be taking a $500 million charge in the fiscal second quarter. Company executives said that they expect the cuts to enable them to save between $125 million and $150 million per quarter, with the full effects being seen in the fiscal fourth quarter.

Until now, Sun has been able to avoid the kind of mass job cuts other tech companies have suffered since the industry bubble burst. The company did announce it would layoff 300 of its around 43,000 employees last August, however.

With its current workforce reduction, company executives said that the cuts will not have a significant effect in the areas of research and development (R&D), sales and customer support. Sun Chairman and Chief Executive Officer Scott McNealy underscored the importance R&D plays in the company's success, given that it is more focused on products than services.

"We're keeping the R&D department big and intact," McNealy said. "We are not shutting down those operations."

Looking ahead, Sun executives refused to give a revenue estimate for the second quarter, citing economic uncertainty, but did predict that the company would reach breakeven status no later than June of 2002.

While some of the company's main customers, such as the telecom and financial services industries, are currently experiencing financial difficulties, McNealy expressed optimism that the company would be successful at targeting other markets, such as the health and security industries, to diversify revenue streams.

In addition, McNealy cited confidence in the strength of Sun's server line and Java initiatives, saying that these areas give the company a leg up on its main competitor, IBM Corp.

"In terms of competition, it's down to just us and IBM ... and there's a clear differentiation," McNealy said, adding that Sun has advantages with its open standards and compatibility.

McNealy also seized the opportunity to take a swipe at IBM's new Unix server, Regatta, launched yesterday, saying "we are very confident we can compete against that."

Despite the bad financial news Sun presented Friday, McNealy remained positive.

"We are a great company in a bad economy," he said.

U.S. financial markets, which have taken to a duck-and-cover strategy at any hint of economic woes, did not respond as well, however.

After Sun's announcement, company shares (SUNW) sunk 3.98 percent to $8.92. Analysts said that the disappointing news contributed to a tech-led downturn in the markets. The Dow Jones Industrial Average dropped 39.92 points, or 0.44 percent to 9,020.96 in late morning trading, while the Nasdaq slumped 28.10 points, or 1.75 percent to 1,569.21.

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