Update: Sun posts $760 million loss, shuffles hardware units

Two senior execs leave Sun

Sun Microsystems Inc. on Thursday reported a net loss of $760 million, or $0.23 per share, in the third quarter of its fiscal 2004 year, which ended March 28. The company also announced a reorganization of its hardware divisions, as well as the departure of two senior executives: Chief Marketing and Strategy Officer Mark Tolliver and Executive Vice President of Volume Systems Products Neil Knox.

Sun's revenue for the quarter was $2.65 billion, down 5 percent from the $2.79 billion it reported in the third quarter of 2003.

The company's $1.7 billion in product revenue for the quarter was nearly 10 percent less than the $1.9 billion it had reported for the same quarter in 2003. Storage revenue made up $346 million of that $1.7 billion total, down 6 percent from the year-earlier quarter.

Revenue for the company's services division was up from the year-earlier quarter, however. The company reported services revenue of $940 million for the third quarter of 2004, up from $893 million in the same quarter of 2003.

Another bright spot was Sun's Java Enterprise System server software, which realized an 88 percent jump in subscribers, according to Scott McNealy, Sun's chairman and chief executive officer, who spoke on a conference call Thursday. Sun had 93,000 subscribers to the $100 per-employee, per-year licensing plan in the second quarter of 2004. That number climbed to 175,000 subscribers in the most recent quarter, McNealy said.

The company also announced its first major reorganization since Jonathan Schwartz was appointed chief operating officer and president on April 2.

Effective immediately, the company's microprocessor and UltraSparc-based systems groups will be combined into a new Throughput Systems organization, which will be led by David Yen, who formerly headed up the company's processor division.

A new Network Systems division, headed on an interim basis by the former chief technology officer of Sun's software group, John Fowler, will be responsible for the company's systems based on x86 processors from Intel Corp. and Advanced Micro Devices Inc.

Sun is conducting "internal and external searches" for a permanent head of this division, a company spokeswoman said.

Anil Gadre, Sun's former vice president of software marketing, will replace Tolliver as the company's chief marketing and strategy officer, Sun said, and Brian Sutphin will now serve as vice president of corporate development.

Both executives, as well as Yen and Fowler, will report to Schwartz, who now oversees an executive team that also includes the heads of Sun's storage, software, services and sales divisions.

Tolliver and Knox left the company to "pursue other interests," Sun said in a statement.

McNealy downplayed the effect of the management changes. "The management change of putting Jonathan (Schwartz) in as COO is not entirely disruptive," he said during the Thursday call. "Very, very few people have a new boss. That's what really drives disruption."

One industry analyst who follows Sun, however, said that the changes within Sun appeared to be significant, and when combined with the company's April 2 settlement with Microsoft Corp. were signs of a company in the midst of a major reinvention. "This has occurred very rapidly, and is (of) a very large scope," said Illuminata Inc. Principal Analyst Jonathan Eunice said of Sun's organizational changes.

"To me this and the Microsoft deal are the results of the, 'We know we're going to have to do things differently around here' observation," he said.

During the next quarter Sun will begin laying off approximately 3,300 employees or 9 percent of its workforce, the company announced on April 2.

The departure of Knox, who had success bringing Sun's v880 server and Intel and AMD systems to market, is a setback for the company, Eunice said. "Knox was very successful; he was well-aligned with what Sun wanted to do a year ago and very successful in driving products to market," he said. "Neil Knox leaving the company, in my humble opinion, is a major loss."

Knox's peer, Clark Masters, who had been in charge of the company's Enterprise Systems group, has not left the company, but it is unclear what he will be doing in the reorganized Sun. "Clarke's still at a point where he is considering a number of internal options," Schwartz said during the conference call.

Also on Thursday, Sun announced that it had completed the acquisition of computer system design company Kealia Inc., which was founded by Sun co-founder Andy Bechtolsheim. Kealia was purchased in exchange for approximately 20 million shares of Sun's common stock, the company said in a statement.

Sun plans to formally drop the Kealia brand.

"No one could pronounce it anyway," the statement said.

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