Sun posts loss; McNealy throws jabs

The server maker loses $431 million, but execs talk of progress. Meanwhile, CEO Scott McNealy speaks of bayonets and developers, and even mocks Bill Gates.

Margaret Kane
Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
3 min read
Sun Microsystems reported a fiscal second-quarter loss of $431 million, including a $511 million restructuring charge, but executives said the company "is showing signs of progress" and predicted profits for the quarter ending June 30.

Sun recorded revenue of $3.1 billion for the quarter, up from $2.8 billion in the first quarter but down 39 percent from a year ago. The company had a net loss of 13 cents per share, including a restructuring charge and $39 million investment loss, which was offset by a $218 million reduction in taxes.

Excluding all the special items, the company reported a loss of $99 million, or 3 cents per share. Analysts were expecting the company to report a loss of 4 cents per share, on sales of $3.09 billion, according to First Call.

Despite the loss, Sun CEO Scott McNealy reverted to his familiar role as chief barb thrower. In a recent interview with CNET News.com, McNealy displayed all of his characteristic cockiness, noting that Sun is "not in a hole."

On a conference call Friday, McNealy was true to form. He was generally optimistic about the coming year, at least for Sun, even though he said that some of his traditional high-tech customers are not buying as much as they used to.

"We are able to get design wins by going out and getting a whole bunch of new customers. These were a whole mess of design wins against old traditional competitors," he said. "We're winning more business and design wins than we have in a long time."

Chief Financial Officer Michael Lehman said on the conference call that the company expects third-quarter revenue to be slightly higher than second-quarter figures, but held off giving a range until the company presents its formal quarterly update in February.

He added that the company should see a "modest improvement" in overall gross margins, which were at 36.6 percent for the second quarter, in part because of lower component cost and an improved product mix.

Sun is on track to return to profitability in the June quarter, he said.

"Compared with Sun's first fiscal quarter, bookings and revenue in the second fiscal quarter are up sequentially and inventory reductions are in excess of $200 million," he said in a statement. "We generated cash in the quarter on an operating basis, even with the payments we've made on our restructuring, and Sun's cash and liquid marketable investment position remains strong at approximately $6 billion."

The information technology industry is coming off what was basically an abysmal year. Competitors IBM and Microsoft reported results Thursday, which, while slightly better than expected, didn't hold out much hope for the upcoming year.

For its part, Sun has been struggling largely because it relied on dot-com, telecommunications, and financial services customers for much of its sales growth. Many dot-coms went extinct; telecommunications companies have cut spending, and the financial services industry has struggled amid Wall Street's downturn.

To counter the downturn among Internet, telecommunications and financial companies, Sun executives said, the company is focused on the growing sales to the government, life sciences, retail and energy industries.

McNealy took a militaristic tack in describing Sun's battle for business against Microsoft and others.

"We've got bayonets fixed, and we'll go into any cave no matter how dark and dank it is. And in the air war (against Microsoft to win new developers), we'll go after any developer and not just let them turn over to the dark side," he said.

McNealy also poked fun at Microsoft Chairman Bill Gates' memo about security, saying, "I'll have to write a memo in eight years that availability and reliability and scalability matters." Gates released a memo to employees this week talking about the importance of security to the company's products.

And while some analysts questioned whether competitors were seeing stronger growth than Sun, Chief Operating Officer Ed Zander highlighted the company's strength in the high-end server market.

"I think if you take the server business and what we're doing in the high end, we lead everybody in that class," he said. "We're very pleased, especially with all the money IBM is pouring into advertising."