Sun’s Quarterly Results Confound, DIsappoint

Sun Microsystems executives offered contradictory information in explaining the shortfall in US sales that the company experienced in a third quarter that was found stunningly short of the mark by market analysts and investors.

On one hand, Sun’s CEO Jonathan Schwartz said some of the US weakness in the quarter resulted from small businesses in the US cutting back on IT spending.

Said Schwartz:

“Smaller companies that could make discretionary decisions about (information technology) spending made discretionary decisions—they definitely tapped the brakes.”

That might be so, but it’s a red herring to suggest that Sun, which still makes a large share of its revenue from high-end servers and storage, was taken down by the discretionary spending of small companies. In fact, as Sun CFO Michael Lehman explained, most of Sun’s US revenue decline was attributable to faltering sales of Sun’s high-end storage and server products, which are used by large telecommunications, retail, and government customers.

This apparent disconnect between the company’s CEO and CFO warrants careful consideration. Sun doesn’t depend on hardware sales to mom-and-pop web retailers, but it continues to rely heavily on some of America’s largest telecommunications and corporate IT buyers. Any sustained downturn in that market segment could be severely damaging to Sun.

In addition to disappointing its investors and the skating judges on Wall Street with its weak quarterly results, Sun also attempted to scale back expectations for the remainder of the year. Guidance was tepid at best. What’s more, Sun will shed more employees — between 1,500 and 2,500 in total — the third major reduction in force under the helmsmanship of Schwartz, who might want to think twice about eating in the company cafeteria.

The vast majority of the cuts will fall in the United States, though the company hasn’t said so.

Despite the $1-billion acquisition of MySQL earlier this year, Sun remains, first and foremost, a purveyor of computer hardware. That is as it has been, and it will remain so. Even in buying MySQL, Sun’s objective is to use software giveaways as a means of retaining existing customers and obtaining new ones so that the company can sell hardware and associated services.

An erosion in sales of high-end servers, which appears to be occurring in the USA, is serious cause for concern at Sun headquarters. Even though sales in emerging economies, such as India and Brazil, are growing briskly, few customers in those countries are ready to buy Sun’s highest-priced, big-margin gear.

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