Sun struggles in Q1

Analysts hungry for blood

As warned, Sun Microsystems posted underwhelming results for its first quarter, but the company's gripping conference call with financial analysts more than made up for the sub-par numbers.

For the period ended Sept. 28, Sun reported revenue of $2.54 billion, which is an 8 percent drop from the $2.75 billion reported in the same quarter last year. The company posted a net loss of $286 million in this year's Q1 versus a net loss of $111 million last year.

On top of the revenue slide, Sun was unable to generate cash from operations. The company takes great pride in generating cash even in tough times, and this certainly came as a blow.

Sun's CFO Steve McGowan did his best to put a positive spin on the news.

"Despite our challenges this quarter, we reached the highest level of services revenue ever for a fiscal first quarter and we made strong gains in the 1-2 way server market," McGowan said. "We reduced SG&A expenses by $84 million year over year, and although cash flow from operations was a negative $49 million, we exited the quarter with a cash and marketable securities position of over $5.5 billion."

McGowan then walked through the results in detail, pointing to a 4 percent rise in services revenue year-on-year to $902 million and a 13 percent decline in product revenue to $1.63 billion, which includes a 4 percent drop in storage sales. Revenue in Europe was down 3 percent, Japan was down 26 percent and the rest-of-the-world was down 9 percent year-on-year.

Sun added that it saw an unfavorable mix of high-end and low-end servers that hurt margins. Sales of the lower end V210 and V240 servers outpaced those of higher-end Sun Fire 12K and 15K servers by a wider than normal margin.

After dolling out these rather grim facts, Sun's volume systems chief Neil Knox jumped on the horn for a brief advertisement. He rattled off a number of facts about Sun's new Intel-based servers, Solaris x86 and low-end Sparc systems and how Sun beats Dell on price just about everywhere possible.

"We are doing what we need to do to make sure Sun stands for price performance," he said. "Please stay tuned for some more exciting announcements that will be coming this quarter. And now, back to you, Scott."

Sun's CEO Scott McNealy found the infomercial as bizarre as we did.

"Thanks, Neil," he said. "Do they get a Ginsu with that?"

McNealy took over at that point and returned a bit of respectability to the call.

Sun has endured a recent onslaught of critical analyst reports, calling for mass layoffs at the company and a change in strategy. Sun has only reached profitability a couple of times in the last two years, and the analysts are pressuring the company more than ever to say when it will be able to stay in the black. A recent $1 billion charge did not help matters.

"We are doing our best to be a disruptive innovator," McNealy said. "We think it's working. It's not showing up in the numbers, and we're not happy with that, but we'll keep plugging away."

McNealy noted that Sun has picked up 60 customers for its N1 software/hardware management technology and has 90 bids for the new Java Enterprise System software stack. He urged that these are both spots of hope for the company.

This was not enough to silence one of Sun's most vocal critics - Toni Sacconaghi, analyst at Sanford Bernstein. Sacconaghi pushed McNealy to say whether or not the board had a hand in refusing another round of layoffs or if this was just a CEO whim. As always, the analyst did so with eloquence and fairness, as he is a shining star in an otherwise tarnished profession.

After some teeth-pulling, McNealy assured the analyst crowd that the board and his top level staff agreed that the time is not ripe to make more job cuts.

"I have had a lot of talks with customers and none of them are saying, 'Please stop doing R&D,'" McNealy said. "None of them have said, 'Please back off on all the services and support.'"

Sacconaghi pushed again in what became a rather tense moment of the call.

"Is there not an imperative to at least toss around the pros and cons (of job cuts)?" he asked. "I am trying to understand how formally that was done. If this performance is repeated, what kind of assurance do shareholders have that Sun will be more firm in expense reductions going forward."

"The board has been involved every step of the way," McNealy responded. "I think we need to give this thing a little longer to ride."

For those who don't have time to spend listening McNealy and Sacconaghi duke it out, we hope this gives a flavor of the affair. Both men are quite good at what they do, and their sparring matches are a treat. The same cannot be said when Merrill Lynch's lip gloss guru Steve Milunovich decides to show up for a call.

The Loon charged that the "old Sun" had a singular focus on Sparc chips and Solaris. He wanted to know where this focus has gone and how Sun could repair its public image. (This question coming from an analyst who just weeks ago recommended that Sun drop Sparc and did so in the most public way possible, penning an open letter to McNealy.)

"Well, you could help," McNealy said, wondering how Milunovich's call got past the operator.

"I'm trying, but you're not listening," Miloonovich replied. The conference call having denigrated into a tit-for-tat squabble.

McNealy then tried to make nice by complimenting Milunovich's new pair of polka-dotted thigh-highs and snazzy Hello Kitty backpack.

Well, okay, the conversation didn't turn that ugly, but it may as well have. The analysts across the board pushed Sun to answer some tough questions. They've started calling more and more for Sun to bring in a strong number 2 to back McNealy up and are asking to see near-term results from a company that has very much a long-term strategy.

If Sun's current software strategy does not start helping the bottom line quick, it's only going to get uglier for Sun in the coming quarters. The company has plenty of cash to wait for its hardware bets such as multicore chips to pay off, but one wonders if the fierce financial mob will get to it before then. ®

Other stories you might like

  • Lonestar plans to put datacenters in the Moon's lava tubes
    How? Founder tells The Register 'Robots… lots of robots'

    Imagine a future where racks of computer servers hum quietly in darkness below the surface of the Moon.

    Here is where some of the most important data is stored, to be left untouched for as long as can be. The idea sounds like something from science-fiction, but one startup that recently emerged from stealth is trying to turn it into a reality. Lonestar Data Holdings has a unique mission unlike any other cloud provider: to build datacenters on the Moon backing up the world's data.

    "It's inconceivable to me that we are keeping our most precious assets, our knowledge and our data, on Earth, where we're setting off bombs and burning things," Christopher Stott, founder and CEO of Lonestar, told The Register. "We need to put our assets in place off our planet, where we can keep it safe."

    Continue reading
  • Conti: Russian-backed rulers of Costa Rican hacktocracy?
    Also, Chinese IT admin jailed for deleting database, and the NSA promises no more backdoors

    In brief The notorious Russian-aligned Conti ransomware gang has upped the ante in its attack against Costa Rica, threatening to overthrow the government if it doesn't pay a $20 million ransom. 

    Costa Rican president Rodrigo Chaves said that the country is effectively at war with the gang, who in April infiltrated the government's computer systems, gaining a foothold in 27 agencies at various government levels. The US State Department has offered a $15 million reward leading to the capture of Conti's leaders, who it said have made more than $150 million from 1,000+ victims.

    Conti claimed this week that it has insiders in the Costa Rican government, the AP reported, warning that "We are determined to overthrow the government by means of a cyber attack, we have already shown you all the strength and power, you have introduced an emergency." 

    Continue reading
  • China-linked Twisted Panda caught spying on Russian defense R&D
    Because Beijing isn't above covert ops to accomplish its five-year goals

    Chinese cyberspies targeted two Russian defense institutes and possibly another research facility in Belarus, according to Check Point Research.

    The new campaign, dubbed Twisted Panda, is part of a larger, state-sponsored espionage operation that has been ongoing for several months, if not nearly a year, according to the security shop.

    In a technical analysis, the researchers detail the various malicious stages and payloads of the campaign that used sanctions-related phishing emails to attack Russian entities, which are part of the state-owned defense conglomerate Rostec Corporation.

    Continue reading
  • FTC signals crackdown on ed-tech harvesting kid's data
    Trade watchdog, and President, reminds that COPPA can ban ya

    The US Federal Trade Commission on Thursday said it intends to take action against educational technology companies that unlawfully collect data from children using online educational services.

    In a policy statement, the agency said, "Children should not have to needlessly hand over their data and forfeit their privacy in order to do their schoolwork or participate in remote learning, especially given the wide and increasing adoption of ed tech tools."

    The agency says it will scrutinize educational service providers to ensure that they are meeting their legal obligations under COPPA, the Children's Online Privacy Protection Act.

    Continue reading
  • Mysterious firm seeks to buy majority stake in Arm China
    Chinese joint venture's ousted CEO tries to hang on - who will get control?

    The saga surrounding Arm's joint venture in China just took another intriguing turn: a mysterious firm named Lotcap Group claims it has signed a letter of intent to buy a 51 percent stake in Arm China from existing investors in the country.

    In a Chinese-language press release posted Wednesday, Lotcap said it has formed a subsidiary, Lotcap Fund, to buy a majority stake in the joint venture. However, reporting by one newspaper suggested that the investment firm still needs the approval of one significant investor to gain 51 percent control of Arm China.

    The development comes a couple of weeks after Arm China said that its former CEO, Allen Wu, was refusing once again to step down from his position, despite the company's board voting in late April to replace Wu with two co-chief executives. SoftBank Group, which owns 49 percent of the Chinese venture, has been trying to unentangle Arm China from Wu as the Japanese tech investment giant plans for an initial public offering of the British parent company.

    Continue reading
  • SmartNICs power the cloud, are enterprise datacenters next?
    High pricing, lack of software make smartNICs a tough sell, despite offload potential

    SmartNICs have the potential to accelerate enterprise workloads, but don't expect to see them bring hyperscale-class efficiency to most datacenters anytime soon, ZK Research's Zeus Kerravala told The Register.

    SmartNICs are widely deployed in cloud and hyperscale datacenters as a means to offload input/output (I/O) intensive network, security, and storage operations from the CPU, freeing it up to run revenue generating tenant workloads. Some more advanced chips even offload the hypervisor to further separate the infrastructure management layer from the rest of the server.

    Despite relative success in the cloud and a flurry of innovation from the still-limited vendor SmartNIC ecosystem, including Mellanox (Nvidia), Intel, Marvell, and Xilinx (AMD), Kerravala argues that the use cases for enterprise datacenters are unlikely to resemble those of the major hyperscalers, at least in the near term.

    Continue reading

Biting the hand that feeds IT © 1998–2022