Job cuts not Sun CEO's priority
FOCUS ON COST CUTS, NEW REVENUE
By Therese Poletti
Mercury News
Sun Microsystems' new chief executive, Jonathan Schwartz, has vowed not to make the deep job cuts some on Wall Street say are needed to revive the company's profits.
That puts him on the hot seat to outpace rivals who are out-dueling Sun in its core business of selling computers that deliver Web sites, handle transactions and house corporate data.
Analysts who follow the Santa Clara company say Schwartz needs to do three things: cut staff, jettison unprofitable products, and develop new ideas to take market share back from lower-cost competitors. And if he lets go of fewer people, they say, he will have less room for error with new ideas.
On Monday, after he was named to succeed Scott McNealy as CEO, Schwartz told analysts that he and his executive team plan to use the spring to review Sun's growth opportunities and research projects, and generally assess the health of the company.
``In the spirit of sharing, Mike and I will be sharing an office,'' Schwartz quipped, referring to Mike Lehman, who left retirement in February to reprise his role as Sun's chief financial officer. Schwartz was not available Tuesday for interviews.
Sun, like IBM in the '90s and Digital Equipment in the '80s, is finding its core business under attack. For IBM it was the mainframe, for Digital it was the minicomputer and for Sun, it is network servers running Solaris, its own version of the Unix operating system.
Since the dot-com bust, competitors have successfully used lower-cost chips and open-source software to lure customers away from Sun, whose computers traditionally have been built with technology that's elegant, proprietary and expensive.
``Sun is a Unix-centric company, and the Unix market doesn't have a lot of growth in it,'' said Toni Sacconaghi, an analyst with Sanford Bernstein. ``The core challenge of trying to grow the company meaningfully when the historical market that has generated the vast majority of your revenues is not growing, that's not going to change.''
Revenue generators
For the past two years, Sun has also been selling lower-cost systems based on chips from Advanced Micro Devices to compete with the threat it faces from Dell, IBM and Hewlett-Packard in the low-cost server market. But the bulk of its revenue still comes from servers designed around Sparc chips running Solaris. Sun saw huge growth of 93 percent in Intel-compatible servers in its most recent quarter, but analysts estimate its proprietary systems, software and storage made up about 80 percent of revenues.
Last year Sun launched new servers based on a new Sparc design, whose energy efficiency, it said, would reduce electricity costs in the power-guzzling data centers where companies store servers. Laura Koetzle, an analyst with Forrester Research, said that's a strategy the company should extend to distinguish itself.
``The proprietary stuff that they have placed bets on has to be focused on some particular problem,'' Koetzle said. ``Power consumption, heating and cooling is a beautiful example.''
Schwartz said Monday that Sun's overall product strategy would not change. He also said he was not planning the big layoffs some on Wall Street were predicting. Therefore the company must look for cost-cutting opportunities within operations and for new areas of revenue growth.
Analysts still expect some layoffs, but not on the massive scale some on Wall Street have prescribed. Since Lehman came back to Sun, some investors have been expecting the company to do a big round of job cuts. Sacconaghi was estimating cuts of 25 percent or even higher. Sun's shares rose about 20 percent since Lehman's return, on those expectations.
Job cut estimates
Laura Conigliaro, a Goldman Sachs analyst, said in a report Tuesday that she believes Sun could cut between 5,000 and 8,000 employees. Sacconaghi is now estimating 3,800 to 5,700 job cuts, or 10 to 15 percent of the total workforce of around 38,000.
Some even caution that Schwartz may not be the right executive for the job. He lacks the turnaround experience exemplified in Mark Hurd, Hewlett-Packard's current chief executive, and he has a history with the company that may make some cuts emotionally difficult.
``They need a turnaround guy to come in and do the kinds of things turnaround guys do,'' said Rob Enderle, an analyst with the Enderle Group. ``You cut deep in terms of employees and promise you will never do it again. That is textbook, like Hurd and Lou Gerstner'' at IBM. |
