Silicon Valley networking giant and maker of business software Sun Microsystems posted a whopping loss of $1.7 billion, citing a 7 per cent drop in sales due to the economic downturn which stalled customers buying its high end products and a goodwill impairment charge that cost the company $1.45 billion and hinting at possible layoffs.

A year ago Sun made a profit of $89 million but this quarter sales slipped to $3 billion down from $3.219 billion in the same period a year earlier. Its $2.24 loss per share was considerably larger than what analysts expected at 8 cents a share on $3.06 billion in sales.

Since the past four months there has been wide speculation on the company and according to media reports, after the announcement of its results there were widespread rumours that the company would put itself for sale and in August this year there were rumors of a takeover. (See: Sun Microsystems a takeover target: report)

This week it had to cope with the sudden departure of billionaire, Andreas von Bechtolsheim, Sun's co-founder and chief scientist and highly regarded systems designer, who left to join a startup he founded, Arista Networks, as its chief development officer. (See: Sun loses co-founder and chief scientist Andy Bechtolsheim to startup Arista Networks)

The company pulled back its annual operating margin forecast to 28 per cent, down from a prior estimate of 28.5 per cent to 29 per cent and said it will release the new forecast only if it can increase software and service revenue but also said the economic outlook was too uncertain to give a software sales forecast.

"Although we saw another quarter of growth in our Solaris-based Chip Multi-Threading and Open Storage systems, the economic downturn continued to weigh on our customers, especially those that contribute to our traditional high-end businesses," said Jonathan Schwartz, CEO of Sun Microsystems.

"With a continued focus on operational alignment, a strong cash position, and the market increasingly looking to open source innovation as a vehicle to escape proprietary vendor pricing, we believe Sun is well positioned to weather the downturn and ultimately become the biggest beneficiary in the open source revolution in both systems and software," he added.

Mike Lehman, chief financial officer said the company was not happy with the results but said the company would evaluate measures aimed at returning to profitability.

Jonathan Schwartz, said that the company would not sell any of its assets or business units to improve profitability but will focus on building sales or even make "targeted acquisitions" with the $3.1 billion in cash and short-term investments.

The bulk of Sun's business comes from the financial sector which has seen a dramatic collapse with North America being the weakest region in the quarter accounting for a loss in sales of 20 per cent from the financial companies, and sales in Europe also showing a downward trend with a large drop coming from the British financial sector.

Comparatively, sales rose for some of Sun's newer systems and for software licenses, although they represent a smaller portion of Sun's overall business.

Sun's servers and Java software which run many Web sites and business operations has struggled to change which has forced users to use custom software and processors to cheap computers powered by commodity parts and free, open-source software instead of using high end machines.

It a bid to expand its software, it gave many high end products under an open-source model on the premises that by distributing its software en-mass it will lead to a greater generation of hardware and services revenue which did not materialize to the expectations of the company.

Midrange and high-end servers based on Sparc processors began to see softness starting back in the third quarter of the last fiscal year and fell 27 per cent in the first quarter, compared to the same period a year ago but in comparison, Sun's Solaris-based chip multi-threading systems, which use Sun's "Niagara" processors, grew 83 per cent in the quarter compared with last year.

Southeastern Asset Management, a Tennessee investment firm who recently bought a 21 per cent stake in the company has expressed confidence in Schwartz, but said last week they planned to have discussions with Sun about improving the stock value.