Sun Cuts Earnings Projections on Consensus Revenues for Fiscal Q4

Published: July 17, 2008

by Timothy Prickett Morgan

There has been some chatter about the financial health of server maker Sun Microsystems in recent weeks, which if you want to be honest about it doesn't make those weeks much different from hundreds of others in the past couple of years. Sun, obviously seeing this not-so-good news and also seeing reports that president and chief executive officer, Jonathan Schwartz, might be ousted if Sun doesn't get some profit and revenue growth, decided this week to announce preliminary financials for the fourth quarter of fiscal 2008.

The fourth quarter ended for Sun on June 30, and it is traditionally the company's best quarter because it is its end of year, so the company's sales reps and resellers are motivated to give one more final push and the calendar quarter is usually a little less restricted because IT shops have visibility into the year and know what they can and cannot spend. Sun said in a statement put out on July 15 that it would report sales in the range of $3.725 to $3.8 billion, compared with the $3.835 billion in revenues the company booked in the fourth quarter of fiscal 2007. Sun added that gross margins in Q4 would be in the range of 44 percent to 45 percent, and that net income per diluted share would be in the range of 5 cents to 15 cents, which includes a restructuring charge of approximately $100 million. Wall Street analysts polled by Thomson Financial averaged to an expectation of $3.8 billion in sales and 27 cents per share in earnings. Despite the earnings slip, the fact that Sun was able to deliver revenues in the consensus range helped to buoy its share price this week. But Sun's shares rallying nearly 10 percent after the news broke (and settling at around $9 a share as we go to press on Wednesday afternoon) doesn't do much when the shares have dropped from the $25 level set in October 2007, when Sun was on the mend and the U.S. economy wasn't yet hurting so badly.

"In these difficult economic times, we continue to see customers across the world look to open software and hardware as a source of savings, and feel Sun is well positioned with our most robust line ever of server, storage, software and service offerings," explained a typically optimistic Schwartz in the Sun statement.

Still, with Sun not yet pulling in respectable earnings, Schwartz will continue to be under pressure. The Fox trade rag Barron's, the weekly sister paper of the Wall Street Journal, ran a story on July 9, which you can read here, that suggested that Schwartz might be out the door. The Barron's piece was based on a report inside the Silicon Insider newsletter put out by Trip Chowdry of Global Equities research, which suggested that Sun would be laying off another 1,000 to 2,000 employees in the next one to two months and that the company had begun a search for a new CEO. I don't have the ear of the Sun board or Schwartz, so I have no idea if this is true. But it seems to me that Sun would be hard pressed to find someone better to do the job.

Sun co-founder and current board chairman, Scott McNealy, could be brought back, of course, having given Schwartz four years to turn the company around. We'll see. I don't hear any fat lady singing quite yet, despite Sun's woes, and mainly because of the nearly impossible task that Schwartz faces. I think it far more likely that Sun is acquired by IBM, Hewlett-Packard, or Fujitsu. I am not advocating for that, since I like competition. Like Sun's customers, I want Sun to figure out how to make money again because diversity and competition drive the IT newsletter business, too.

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