Sun revenues drop, shipments stopped

Sun Microsystems Inc. saw its first-quarter fiscal 2004 revenues decline eight per cent to US$2.5 billion, the Santa Clara, Calif., computer maker announced on Thursday.

Revenues dropped from the US$2.7 billion Sun reported in its year-ago quarter.

The company posted a net loss of US$286 million, or US$0.09 per share. At the end of September, Sun had warned it would be posting losses in the US$0.07 per share to US$0.10 per share range for this quarter.

The company experienced growth in its storage and services divisions. The services division booked US$900 million in sales for the quarter, the highest ever first-quarter earnings for the services group, according to Steve McGowan, Sun’s chief financial officer and executive vice-president, speaking during a conference call to discuss the company’s financial results.

Single- and dual-processor servers represented the fastest growing part of Sun’s server product line, said Scott McNealy, Sun’s chief executive officer, on the conference call. “We see the low-end being kind of the hot new market right now,” he said.

A rebound for Sun’s higher-end servers seems farther off, according to McNealy. “I think the high end will come back in the next couple of years when we’ve got the next generation of Solaris,” he said. “We think server consolidation will drive some of the bigger machines, down the road. But that ain’t going to happen for a while.”

Sun’s product revenue was US$1.6 billion for the quarter, a decline of 13 per cent from the year-ago period, McGowan said.

The company was unable to ship a number of its servers, including the Sun Fire V210 and V240, for the first month of the quarter. “In the month of July, most of our server product line was on stop ship,” he said.

As a consequence of this stoppage, Sun shipped products representing 60 per cent of its revenue in the last four weeks of the quarter, McGowan said.

Sun declined to say which products, other than the V210 and V240 were affected by the stop ship, or what specifically caused it to happen, but a company spokesperson characterized the delay as the result of increased quality assurance levels. There were “a variety of quality issues that we needed to correct,” said the spokesperson. “Sun is all about rigorous implementation and testing at every level from the components to the systems.”

But the fact that Sun had to hold up shipment on most of its servers raises questions about the quality control at the company, said Clay Ryder, a vice-president with industry research firm the Sageza Group, Inc. “I think it really gets down to the why,” he said. “If it was due to bugs across a broad spectrum of the products, you have to wonder what is happening to quality control.”

The bigger question for Sun, Ryder said, was whether or not the company, whose revenues were over US$5 billion per quarter three years ago, will again find a way to grow. “A publicly traded company like Sun has got to demonstrate growth in order to maintain investor confidence,” he said. “Sun has not had the best return over the last couple of years.”

During the call, McNealy said that Sun was looking to a number of areas for growth, including managed services and integration services. “We think there’s a huge opportunity to cannibalize the huge amount of dollars being spent out there on integration,” he said.

Sun’s CEO also expressed high hopes for his company’s recently announced Java Enterprise System and Java Desktop System software, saying that Sun’s rivals had yet to respond to their per-employee licensing plans. “I’d just like to sign up a small percentage of the worldwide employee base and this could become a very high return-rate opportunity for us,” he said.

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