Sun: Quality issues affected shipments in Q1

IDG News Service - Sun Microsystems Inc. was unable to ship a number of its servers, including the Sun Fire V210 and V240, during the first quarter of its 2004 fiscal year, the company said yesterday.
"In the month of July, most of our server product line was on stop-ship," said Steve McGowan, Sun's chief financial officer and executive vice president. His comments came during a conference call to discuss the company's financial results. As a consequence of this stoppage, Sun shipped products representing 60% of its revenue in the last four weeks of the quarter, he said.
Sun declined to say which products, other than the V210 and V240, were affected by the stop-ship or what specifically caused it to happen, but a company spokeswoman characterized the delay as the result of increased quality-assurance levels. There were "a variety of quality issues that we needed to correct," said the spokeswoman. "Sun is all about rigorous implementation and testing at every level, from the components to the systems."
But the fact that Sun had to hold up shipment on most of its servers raises questions about the quality control at the company, said Clay Ryder, a vice president at research firm The Sageza Group Inc. in Mountain View, Calif. "I think it really gets down to the why," he said. "If it was due to bugs across a broad spectrum of the products, you have to wonder what is happening to quality control."
The bigger question for Sun, Ryder said, is whether the company, whose revenue was over $5 billion per quarter three years ago, will again find a way to grow. "A publicly traded company like Sun has got to demonstrate growth in order to maintain investor confidence," he said. "Sun has not had the best return over the last couple of years."
The company reported that first-quarter fiscal 2004 revenue declined 8% to $2.5 billion (see story), compared with revenue of $2.7 billion in same quarter a year ago.
The company posted a net loss of $286 million, or 9 cents per share. At the end of September, Sun had warned that it would be posting losses of between 7 cents and 10 cents per share.
The company said it experienced growth in its storage and services divisions. The services division booked $900 million in sales for the quarter, the highest ever first-quarter earnings for the services group, according to McGowan.
Single- and dual-processor servers represented the fastest-growing part of Sun's server product line, said Sun CEO Scott McNealy during the conference call. "We see the low end being kind of the hot new market right now," he said.
A rebound for Sun's higher-end servers seems further off, he said. "I think the high end will come back in the next couple of years when we've got the next generation of Solaris. We think server consolidation will drive some of the bigger machines, down the road. But that ain't going to happen for a while."
Sun's product revenue totalled $1.6 billion for the quarter, a decline of 13% from the year-ago period, McGowan said.
McNealy said Sun is looking toward a number of areas for growth, including managed services and integration services. "We think there's a huge opportunity to cannibalize the huge amount of dollars being spent out there on integration," he said.
He also expressed high hopes for his company's recently announced Java Enterprise System and Java Desktop System software, saying that Sun's rivals had yet to respond to their per-employee licensing plans. "I'd just like to sign up a small percentage of the worldwide employee base, and this could become a very high return-rate opportunity for us," he said.

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