Sun Microsystems to Cut Up to 5,000 Jobs

Sun Microsystems Inc. (SUNW) CEO Jonathan Schwartz articulated his company's first major strategy shift since taking the reins five weeks ago, announcing a plan to shave up to $590 million in annual costs with as many as 5,000 job cuts.

The strategy doesn't call for Sun to have an operating profit of until the quarter ending in June of 2007, and even then, it's about what analysts had expected.

Investors — who for years have complained Sun hasn't been aggressive enough in cutting costs — sent Sun shares 1 cent lower in extended trading following the announcement.

"It's a lot of fanfare without a lot of change to street estimates," said Brent Bracelin, an analyst with Pacific Crest Securities. "The company did the minimum they needed to do based on analyst estimates out there."

Santa Clara-based Sun, whose revenue has declined four years in a row, said it would reaching the savings goal by cutting 4,000 to 5,000 jobs.

They will reduce Sun's 37,500-person work force by 11 percent to 13 percent over the next six months and cost from $340 million to $500 million over the next several quarters, the company said.

The plan, which also includes selling real estate and exiting leases, will take until June of 2007 to be fully implemented. Sun said it expected to have an operating profit of about 4 percent of sales in the period.

The projection came as Schwartz, who took over as chief executive last month, released a set of financial goals for the first time. They include a forecast for revenue to grow in the "low-to-middle single digits" in the 12 months ending in June 2007 and for gross margin, or the percentage of sales left after paying manufacturing costs, to be about 43 percent in fiscal 2007.

Over the longer term, which Schwartz didn't define, Sun hopes for operating income of 10 percent of sales.

The company, a major supplier of computer servers that run corporate networks and Web sites, was once a Wall Street darling but has struggled since the dot-com bubble burst in late 2000.

Servers that run processors based on Intel Corp. (INTC) designs and Microsoft Corp.'s (MSFT)Windows or the free Linux operating systems have grown increasingly powerful, often performing the same jobs at a fraction of the cost of Sun products.

Investors have driven down Sun shares from a high of about $64 in September of 2000 to a range of about $3.50 to $5 over the past year.

Schwartz, speaking on a conference call with analysts, said the cuts are part of a plan for Sun to simplify its research and product offerings around a core set of technologies that include its Solaris operating system and Niagara microprocessor. Rather than trying to win business from the broadest number of customers, Sun will focus on companies that see Internet usage as a key differentiator in the way they compete.

"Our industry is littered with companies that are trying to be all things to all people, and that is not Sun," Schwartz said.

Thursday's announcement comes a month after Scott McNealy, who remains chairman, stepped down as Sun's chief executive, and it's one of the first major initiatives to be taken under the watch of Schwartz as CEO.

The cuts still don't cut costs as deeply as some analysts have said is necessary. Bracelin, the Pacific Crest Securities analyst, said he had been hoping Sun would reduce costs by at least $1 billion.

McNealy in the past has argued against more drastic work force reductions, saying talented employees are needed once business returns.