Sun Stock Dims on Weak Fiscal Q3

This was not the way to build momentum heading into JavaOne next week.

Sun Microsystems took a big hit on Friday, losing 23 percent of its market value (down $3.85 in mid-morning trading to $12.48) on the news of a loss of $34 million, or 4 cents a share, on weaker sales.

For its third fiscal quarter ended March 30, sales were $3.266 billion, down slightly from $3.38 billion in the same quarter in 2007. Michael Lehman, chief financial officer for Sun (NASDAQ: JAVA), had predicted a 5 percent rise in sales.

Sun became one of the first firms to blame the U.S. economic conditions on its poor performance. Lehman told a conference call with financial analysts that the company began to notice in March that only U.S. customers were deferring orders.

“The U.S. did not meet expectations,” Lehman said. “As a result, U.S. revenue decreased 10 percent on a year-over-year basis. The U.S. is 40 percent of our business, and this could not offset with growth in remaining geographies.”

He went on to say that Sun did not believe those deals went to competitors because they are still in the pipeline. In other words, the customer hasn’t bought anything. But deferred purchases don’t come back immediately, so he couldn’t say if and when the sale would go through.

CEO Jonathan Schwartz added that the company saw growth in 12 of its 16 markets, with 20 percent year-over-year growth in Brazil, 30 percent in India, 8 percent in China and 18 percent in the African and Mediterranean region.

But that wasn’t enough. Part of what hit the company was a $52 million tax bill; otherwise it might have reported the slimmest of profits. As a result of uncertainty in the U.S, Sun is looking to reduce its head count by 1,500 to 2,500.

Sun’s workforce is approximately 34,000, up around 1,100 as of late thanks to recent acquisitions, including MySQL.

The company plans to take an expense charge of $130 million to $220 million in the fourth quarter (ending in June) related to the layoffs and restructuring. The plan will eventually save between $100 and $150 million a year, Sun said.

The one bright spot for Sun was growth in its services business, up 2.3 percent over the previous year, while hardware sales declined. Schwartz said the greatest impact was on high-end hardware as customers substituted large-scale servers for numerous smaller ones, and bought the smaller servers at a staggered pace instead of all at once.

The company expects Q4 to be flat as well, again due to the U.S. situation. “It is clear that the single biggest inhibitor to our ability to achieving such results is what we are seeing now, a major economy in some difficulty,” Lehman said. “We believe we’re on the right track and are making the right investments.”

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