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Sun Loss Doubles as Sales Decline

October 17, 2003|Joseph Menn | Times Staff Writer

Sun Microsystems Inc., battered by the popularity of lower-cost computers from rivals, on Thursday said sales declined for the tenth consecutive quarter and that it lost $286 million, or 9 cents a share, in the three months through September.

The Santa Clara, Calif., computer maker said its loss more than doubled from the $111-million, or 4-cent, loss a year earlier. Revenue declined to $2.54 billion from $2.75 billion.

"It's brutal out there," Chief Executive Scott McNealy said of the competition to sell server computers. "It's a dogfight."

For the first quarter in more than eight years, Sun reported negative cash flow from operations, an event its chief financial officer dismissed as a "blip."

Sun shares slipped 16 cents to $3.63 in regular Nasdaq trading, then fell as low as $3.53 in after-hours trading after the earnings report. The stock has slumped since early June, while most other technology shares have surged.

On a conference call with analysts, McNealy faced unusually hostile questions from critics who contended the company's fundamental strategy needed an overhaul.

Two asked whether Sun's board of directors had become more involved in the company or considered hiring a strong No. 2 to McNealy, who co-founded Sun in 1982.

"Been there, done that," McNealy said.

Other analysts unsuccessfully sought a projection of when Sun would return to profitability with its present structure -- or failing that, when the company would cut significant numbers of workers.

"If this performance is repeated, what kind of assurance do shareholders have that Sun will be more firm in expense reductions?" asked Sanford C. Bernstein analyst Toni Sacconaghi.

"It's got a lot of variables," McNealy responded. "You can't just say, 'OK, if something happens, I'm going to do this.' "

Sun has lost money for the last two years, and its share of the server market has fallen from 16.7% in 2000 to 13.5% by mid-2003, according to IDC.

During the call, analysts said Sun appeared to be waiting for an overall economic recovery, a technology spending recovery or a dramatic shift in the competitive landscape. Sun executives denied that, saying their new computers and other products stood to gain a greater share of the market even if nothing else changed.

In a sign of how the once-cozy relations between big companies and analysts have chilled, Merrill Lynch & Co. analyst Steven Milunovich matched McNealy retort for retort.

Milunovich two weeks ago called for mass layoffs and a new focus at Sun. After he asked on Thursday how McNealy could work on changing at least the perception problem, McNealy responded: "You can help."

"I'm trying, but you're not listening," Milunovich shot back.

Sun is aiming for a comeback by offering less expensive machines running the free operating system Linux and additional, inexpensive desktop software. The hope is that customers will take both that and Sun's more expensive servers.

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