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Sun Micro May Fire 20% of Its Workers, Analyst Says
(Update3)
By Cesca Antonelli
Palo Alto, California, Oct. 4 (Bloomberg) -- Sun Microsystems Inc. may fire more
than 20 percent of its workers as demand slumps for server computers and related
gear, Sanford C. Bernstein & Co. analyst Toni Sacconaghi said.
Every 1 percent reduction boosts the company's earnings per share by a penny a
year, Sacconaghi wrote in a note to clients. With analysts on average expecting a
12-cent profit for fiscal 2002, any layoffs would have a big impact, he said. A 20
percent cut would affect about 8,600 of Sun's more than 43,000 employees.
Sun, the fastest-growing server maker last year, has stumbled in 2001 as clients
cut back spending to save money while economic growth slows. Analysts say
conditions may get worse in coming months, after terrorist attacks hurt consumer
and corporate demand. Sixteen of the 22 analysts who track Sun reduced their
profit targets for this fiscal year in the past month, according to Thomson
Financial/First Call.
``Layoffs now appear inevitable,'' Sacconaghi wrote. His fiscal 2002 earnings
estimate of 10 cents a share includes a 10 percent to 15 percent workforce
reduction, and he said the cuts may reach 23 percent.
Sun rushed to add workers last year, when demand surged as its servers became
popular with Internet-related customers that needed to beef up their operations to
handle online orders. Even as sales sagged this year and rivals cut their payrolls,
Sun didn't announce layoffs.
The Palo Alto, California-based company has seemed more open to the possibility
in recent weeks. Sun said in August that it would end the September quarter with
500 fewer employees and earlier it asked workers to take vacation days to pare
costs.
Sun shares rose 40 cents to $9.40 in early afternoon trading. They've lost two-thirds
of their value so far this year.
Bernstein Study
Sacconaghi studied 13 large companies whose sales eroded this year, including
Cisco Systems Inc., Compaq Computer Corp. and Motorola Inc. He found they'd
started layoffs averaging 24 percent of their staffs.
Cisco has shed more than 6,000 full-time employees, Compaq will chop 8,500
jobs and Dell Computer Corp. plans to eliminate as many as 5,700.
Since spending from communications-related clients and other corporations is
likely to continue to deteriorate, Sun will post a loss this fiscal year unless it cuts
workers, Sacconaghi said. The analyst, who rates Sun shares ``market perform,''
couldn't be reached to elaborate.
``It's not unexpected that they would have to do some layoffs,'' said Bill Rutherford,
whose Rutherford Investment Management owns Sun shares. ``In light of the
terrorist attacks, they've probably seen further softening of their business.''
Sun spokeswoman Elizabeth McNichols declined to comment on the Bernstein
report.
First Quarter
Sun hasn't given a firm sales target for the September quarter. In July, the company
said sales would be more than $3.7 billion, the point at which Sun would break
even before acquisition costs. The following month, officials said the company
wasn't likely to meet that forecast.
``It would take a very large month of September for us to hit the break-even point,''
Chief Financial Officer Mike Lehman said Aug. 29. ``I'm not counting on it. I just
don't think it's realistic at this point.''
Sales in Europe and Japan are below expectations, with U.S. revenue coming in
close to forecasts, Lehman said at the time. Compaq and other computer makers
have said this month that sales dropped further after terrorist attacks Sept. 11.
Sun is expected to lose 4 cents a share in the September quarter and to earn 1
cent in the December period, according to First Call. The company will report
results on Oct. 18.
Other analysts agreed that the results make layoffs likely.
``It's definitely on the table,'' said Megan Graham-Hackett, a Standard & Poor's
analyst who rates the stock a ``hold'' and doesn't own the shares. ``With the muted
sales outlook, we're kind of surprised they didn't do it sooner. They've been kind of
crying for it.''
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