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Waiting for the Sun
Sun Microsystems barely eked out a profit for its fiscal 4Q. Will sales ever shine again?
July 22, 2003: 5:19 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Sun Microsystems is far from being the bellwether that it was back when people used to call it one of the Four Horsemen of the Nasdaq. But its fourth-quarter conference call Tuesday was interesting nonetheless.

As usual, CEO Scott McNealy trash-talked Microsoft (Sun still has an antitrust lawsuit pending against the company) as well as rivals Intel and IBM. McNealy told a joke that Sun followers have heard often, referring to Intel and Microsoft as "General" and "Motors".

McNealy also proudly proclaimed that Sun will be a long-term tech survivor. If nothing else, his defiant remarks tend to be more entertaining than the overly cautious comments you tend to hear on tech earnings calls these days.

But what Wall Street really needs to hear is less bravado from McNealy, whose act is getting a bit stale, and more about how Sun plans to combat the continued erosion of its flagship server business.

Sun's outlook still cloudy

Sun posted revenues of just under $3 billion, down from $3.4 billion a year ago and missing Wall Street's forecast of $3.1 billion. This marks the ninth consecutive quarter of year-over-year sales declines. The company also barely broke even, reporting a $12 million profit, well below the 2 cents per share that analysts were expecting.

Looking ahead, things get slightly better. For its first fiscal quarter, analysts are expecting revenue growth of 2.2 percent, and earnings of a penny per share, compared to a loss of 2 cents.

But unless Sun comes out and tells Wall Street that estimates are too low -- unlikely since management said in January that it would no longer give guidance -- it's difficult to get excited about those numbers.

And even if Sun does hint that the short-term outlook is improving, the biggest problem is that few seem to know what the company's long-term strategy is.

Storage and software hot, servers not

Sun's proprietary Solaris servers, which run on the Unix platform, face intense competition from H-P, Dell and IBM, which sell servers that run on the open source Linux operating system and on so-called "Wintel" servers that run on Microsoft software and Intel chips.

Speaking before Sun's numbers were announced Tuesday, Wendy Abramowitz, an analyst with Argus Research, thinks Sun's server business will suffer from sluggish demand for the next few years.

And though Abramowitz thinks Sun's storage business should do well, that division accounted for only 13 percent of total sales in the last quarter.

The computer-systems division, which includes the servers, accounted for 55 percent. It's never a good sign when the majority of your business appears to be on the decline.

"Sun appears to be a company on the defensive," said Michael Cohen, director of research for Pacific American Securities. Cohen said that Sun reluctantly embraced Linux after H-P, Dell and IBM started to show support for it.

What's more, Sun still manufactures its own line of semiconductors, known as Sparc, even though it sells Solaris operating system software for servers that run on Intel's microprocessors.

Cohen thinks that Sun should focus more on its software products, such as its N1 Web services platform and Java programming software, instead of trying to be a proprietary hardware company.

"That would be a radical makeover but what Sun needs is a radical makeover. It needs to bite the bullet on hardware and make a bold strategic move," Cohen said.

Sun, despite its problems, does have about $5.7 billion in cash and long-term investments to make software acquisitions.

Weak stock price

Shares of Sun Microsystems have bounced back sharply during this year's dazzling tech rally, up 53 percent year-to-date. A big reason, however, is a flurry of takeover rumors, not confidence in the business.

But Sun's overly antagonistic stance towards its likely acquirers, not to mention its $15 billion market value, makes it difficult to imagine how the takeover talk could possibly be more than just idle speculation. So from here on out, Sun is going to have show improving fundamentals in order to justify a higher stock price.

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And if the company stubbornly sticks to its evangelical, and apparently nave belief, that Solaris will reign supreme over Linux and Wintel, then its stock isn't likely to head much higher anytime soon.

Analysts quoted in this story do not own shares in Sun Microsystems and their firms do not do investment banking for Sun.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.