It sure didn't look like Scott McNealy. The Sun Microsystems Inc founder, known for addressing everyone from analysts to employees in faded blue jeans, faced the crowd last month in a stark black suit.
Two weeks after terrorists destroyed the World Trade Center and killed thousands, including one of McNealy's employees, the chief executive took a somber tone as he hosted an event in New York to showcase a new server computer. Employees and analysts whispered that they didn't know he even owned a suit.
"I know there are thousands that were lost, but it's so personal," McNealy said, his voice cracking as he recalled software director Phil Rosenzweig. "Phil got on the wrong plane." As that grief stunts consumer confidence, analysts say it will hurt spending by the large companies that buy Sun servers, storage and software. For a company and an industry already mired in a deep slump, the attacks may turn bad to worse. Though some analysts had seen signs of stabilization before Sept. 11, they said the bottom seems to be falling out again.
PHOTO: BLOOMBERG
About 31 percent of companies will spend less on computers and software after the attacks, and 74 percent don't plan to spend more during the second half than they did in the first, according to a recent Morgan Stanley Dean Witter survey.
Sun reported a fiscal first-quarter loss yesterday on its deepest sales decline since at least 1988. McNealy has fired workers and realigned his sales force to focus on the health-care, retail, automotive and energy industries, and has said he foresees new demand as military spending rises.
Sun, favorite supplier to once high-flying Internet clients and the fastest-growing server maker last year, posted four straight quarters of sales growth of 35 percent or more that calendar year.
The company is now suffering as those customers cut spending during an economic slowdown.
"It is fun and entertainment as you are riding the crest of the wave, when everything you do turns out to be perfect," said Rich Partridge, an analyst with D.H. Brown Associates. "Scott's got to work for a living now." The loss in the period ended Sept. 30 was US$180 million, or US$0.6 a share, compared with net income of US$456 million, or US$0.13, a year earlier. Sales fell to US$2.86 billion from US$5.05 billion.
Sun said the loss would have been US$158 million, or US$0.5 a share, excluding investment losses and acquisition costs. On that basis, which doesn't meet generally accepted accounting principles, the company was expected to lose US$0.6, the average estimate in a Thomson Financial/First Call.
The company on Oct. 5 said sales in the September quarter would be US$2.7 billion to US$$2.9 billion.
While Sun hadn't given a specific sales or profit estimate, signs that demand was crumbling emerged before Sept. 11. In July, Sun said sales would be more than US$3.7 billion, its break-even point before acquisition costs. On Aug. 29, Sun said it would probably have a loss, as sales in Europe and Japan lagged targets.
Now, McNealy doesn't expect the Palo Alto, California-based company to make money again until the June quarter. That has investors concerned.
"If they were able to give some light at the end of the tunnel, I'd love to own the stock again," said Jeff Provence, a fund manager at Value Trend Capital Management, which sold its stake in January. "People simply are not spending the dollars on their products." Sun declined to comment for this story.
McNealy wins high marks from investors for finishing an overhaul of his entire server lineup. Sun started refreshing its products in September last year and wrapped up last month with the New York event that showcased its high-end Sun Fire 15K machine, which can cost more than US$10 million.
That system is crucial for winning International Business Machines Corp mainframe customers and bolstering Sun's sales, analysts said. Postponing the introduction after the attacks would have stalled Sun's momentum further, especially with IBM unveiling its own system the following week.
McNealy needs the 15K to fight off a rejuvenated IBM. Sun servers run the Unix operating system, and the company ruled that market alone for the past few years. IBM and Hewlett-Packard Co are catching up, and McNealy must update his lineup to keep his lead.
The stock has fallen 14 percent since Sept. 11 and 84 percent in the past year. IBM has risen 6.6 percent in 12 months. Fidelity Investments, Sun's largest investor as of June, held a 4.6 percent stake.
Executives including McNealy and President Ed Zander took pay cuts in fiscal 2001, which ended June 30. McNealy got US$100,000 in salary and no bonus, compared with US$4.87 million in cash pay the previous fiscal year. He got stock options that would be worth $44.4 million in 10 years if the stock rises 10 percent a year.
The 46-year-old had been reluctant to fire people, even as sales slowed earlier this year. The bleak outlook after the Sept. 11 attacks pushed him to act, investors said, and Sun now plans to cut 3,900 jobs, or 9 percent of the company's staff.
``I would not be surprised if it's going to be more than that,'' said Sunil Reddy, a fund manager at Fifth Third Bancorp, which owns about 1 million Sun shares.
At that September server debut, it didn't take long for the other McNealy to re-emerge. One of his trademark cracks about archrival Microsoft Corp. slipped out, then a second. He jokingly blamed New York Mayor Rudolph Giuliani for the lighthearted moment.
"Rudy said, `Come do what you do,' and well, this is what I do," McNealy said as the crowd cheered. "Now I feel better." It may take a while for the market to respond the same way.
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