Sun Micro: Layoffs, and a 13-Year Low

Sun Microsystems (JAVA) shares this morning are down sharply to their lowest level since 1995, following a bearish note on the company from Caris & Co.’s Shebly Seyrafi, who cut his price target on the stock to $10.50 from $14.50 “to reflect lower margins following checks indicating that JAVA was aggressively pricing its products in [the fiscal fourth quarter] and to reflect the company’s challenging outlook.”

Sun reports results for its fourth quarter ended June on August 1. The company previously guided to flat revenue with an increase in margins. Seyrafi today actually raised his revenue estimate slightly to $3.85 billion from $3.82 billion, which is a bit above the consensus of $3/8 billion, but trimmed his EPS estimate to 31 cents from 35 cents (which is still above the Street consensus of 27 cents) to reflect lower margins.

Seyrafi writes that the company’s outlook remains “challenging,” asserting that “customers are starting to defer purchases of high-end equipment” such as Sun’s servers.

Meanwhile, the company reportedly has announced 212 layoffs at two facilities in Colorado. Seyrafi notes that the company has already announced plans to cut 1,500-2,000 jobs by fiscal Q2, reducing operating expenses by $100 million to $150 million. Seyrafi says the company had an all-hands meeting July 10 to discuss headcount reduction and to discuss reorganizing the company from 5 division to 2-3 divisions.

For the September quarter, Seyrafi sees revenue of $3.22 billion, in line with the Street, but with non-GAAP profits of just 5 cents a share, below the Street consensus of 12 cents. For the June 2008 fiscal year, Seyrafi now sees profits of 90 cents, cents, down from 94 cents. For FY ‘09, he goes to 89 cents a share, down from $1.06.

JAVA today is down 52 cents, or 5.32%, to $9.25.

UPDATE: Also this morning, First Global analyst Amitabh Goel resumed coverage of the company with an Underperform rating. Goel sees Q4 revenues of $3.791 billion and non-GAAP EPS of 17 cents. He notes that at 13.7x FY ‘08 earnings, the stock’s valuation is “fairly high, considering the company’s dismal performance. “Although management has said that JAVA continues to witness decent order growth in the markets outside the U.S., there are signs of a slowdown in Enterprise IT spending in these markets as well, which could impact the company’s revenue growth. In view of the murky picture, we believe that JAVA is likely to face some serious challenges ahead.”

Previously: I’ve been writing a lot about Sun this week:

• Sun: S&P Cuts Ests, Sets $8.50 Target; Nears 13-Yr Low (July 10, 2008)
• Sun Micro: Could CEO Schwartz Be On His Way Out? (July 9, 2008)
• Sun Micro Hits 6-Yr Low; Will They Ever Grow Again? (July 8, 2008)

I’d especially suggest reading through the extensive reader comments on the July 9 post, which includes the thoughts of many current and former Sun employees; while a few are supportive of the current management team, many are angry and blame current CEO Jonathan Schwartz for the company’s current woes.

Comments

[glacier]

Sounds like you are glued to JAVA with one blog each day.

[Wefwef]

If you really want to blame someone blame AMD. Intel wouldn't have introduced the 64bit extensions and 8 extra registers into the x86 line of cpus, which have helped to bridge the architectural performance gap between x86 and Sparc. Niagaras still reign supreme but Intel's new Nehalem lineup scales up to 8 cores giving lots of trouble to Sun, even though Sun's upcoming Rock should really rock. But when Rock comes out Intel will have Nehalem out in force.

Sun boxes were never affordable, now one can buy a cheap commodity motherboard and config it as a nice server running just about anything, 64bit Linux, OpenSolaris, Solaris itself, or a combination of these with VMWare.

Sun is still great for big servers but they're not alone in that segment either. And their lower end market share is eroded steadily through the familiarity factor, as homegrown techies are more familiar with their own x86 boxes than Sun's datacenter iron.

The irony is that Sun blew this all by themselves by putting a ridiculous price tag on x86 Solaris in early 90's (and pricing their boxes in similar fashion). This gave Linux a free reign. Yeah, what really killed Sun were Linux and AMD.

[andyn]

Do you think they should do a deal with someone? I mean their main competitors - HP and IBM - have BIG services arms bringing in the revenue. Sun should have something like that too.
OR they could partner with Dell - which is at the lower end of the server market with not much research - and become a big hardware player. Though I doubt that since Schwartz was more interested in software. But they missed the boat on making Java pre-eminent.

[AmesTiedeman]

This company should be sold to IBM.

[Nighthunter]

IBM won't be allowed to purchase Sun. Either won't be HP. Dell or Fujitsu might be allowed. If someone is going to acquire Sun it won't be with good intentions.

Sun is a company in good financial standing. This situation is challenging for Sun but it might be not as bad as it look like. It's the Analysts who are pushing down the stock with there wild speculations (like with the oil price) without any rhyme or reason. Most people forget that Sun has a great range of low-end servers which are leaves the Dell, HP and IBM competition in dust. The problem is that Sun's marketing and sales is not really pushing these low-end servers and low-end storage enough.
L like Sun strategy to go open source, however it's wrong giving the software away for "free". However since Sun is giving the software for free Sun's service contract sales did noticeably go up. The basic idea was hoping that customers not just getting the software for free but also buying the support contracts (what customers do) but also are buying the Sun Hardware (what newer software customers don't seem to do)

But I'm still very optimistic that with the recent changes in their management (Peter Ryan as replacement for Don Grandham) the company will be back to profit probably by Q2 in FY09.