Loading...
Symbols:
Authors:

Sun Beats Estimates, But Outlook Dicey

by: Larry Dignan August 01, 2008 | about stocks: JAVA    

Larry Dignan

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Sun Microsystems (JAVA) on Friday reported fiscal fourth quarter net income of $88 million, or 11 cents a share, on revenue of $3.78 billion, down 1.4 percent from a year ago. Adjusted earnings in the quarter were $275 million, or 35 cents a share. However, Sun sees another tough year ahead.

The results topped Wall Street expectations calling for fourth quarter earnings of 25 cents a share on revenue of $3.72 billion (statement). Sun said July 15 that its results would top lowered expectations. Sun also announced a $1 billion stock buyback plan to bolster its shares.

But the outlook for 2009 looks dicey. CFO Michael Lehman said the slowdown in demand the company saw in its March and June quarters will spill over into the first. “We enter the fiscal year with a number of challenges,” said Lehman on the company’s earnings conference call. “The biggest variable will be the buying patterns of our large U.S. customers. We expect modest low single growth in revenue. The first quarter in particular will be challenging. ”

Lehman added that first quarter revenue will decline from a year ago and the company doesn’t expect to turn a profit on under generally accepted accounting principles. For fiscal 2009, Lehman said Sun doesn’t expect U.S. growth until the second half of the year at the earliest. “Given the current environment we’re focused on how to improve our results one year at a time,” he said.

For fiscal 2008, Sun reported flat revenue of $13.88 billion with margins of 46.5 percent, an improvement of 1.3 percent from 2007. Net income for the fiscal year ending June 30 was $403 million, or 49 cents a share, down from $473 million, or 52 cents a share, in 2007. Excluding items, Sun reported net income of $1.1 billion, or $1.34 a share.

While the results are an improvement compared to estimates that have been lowered repeatedly in 2008, the bigger worry is about Sun’s growth potential. It has been making its quarters via cost cutting and the revenue growth just isn’t there. The chart tells the tale:

sun11.png

On a conference call, CEO Jonathan Schwartz indicated that the U.S. economy is hurting growth, but noted that Sun is improving its operating metrics. Schwartz maintained that the company’s move to become an open source leader is the right approach. Sun also said MySQL billings in the fourth quarter were up more than 44 percent from a year ago.

Other notable points from the conference call:

  • Schwartz said in 2008 international growth offset weakness in the U.S. He also noted that Sun is more dependent on U.S. sales than its peers. In other words, the U.S. will keep the lid on Sun’s growth potential.
  • MySQL is fastest growing database and has 12 million users.
  • AMD’s quad-core delays hurt Sun’s server sales and Schwartz admitted that it didn’t have a full Intel lineup. Product margins on high end servers fell.
  • Schwartz said customers say that open source will be the “path forward” for them in data centers. Schwartz argued that technology buyers are consolidating budgets and moving toward open source.
  • In 2009, Schwartz said the company will focus on emerging markets, acquiring new customers through partners and cultivate the open source community, aligning sales resources to growth areas and optimizing systems based on open source technologies.

Also see: JavaFX SDK preview launches: Can Sun play the RIA game?

Sun said it only had $36 million of the $3 billion share repurchase plan left from the buyback initiated a year ago. In comparison, Sun plans to spend $2 billion less on share repurchase than it did a year ago.

Among the key slides:

Gross margin trends:

sun21.png

Server units:

sun31.png

And software trends (click to enlarge chart):

sun4.png

Related Articles

This article has 8 comments:

  •  
    Aug 01 01:23 PM
    they'll get it together
    Reply
  •  
    Aug 01 05:36 PM
    It looks like two things have influenced today's big drop in stock price. First, they lowered expectations on future business. Second, they appear to have disappointed Wall Street with this quarter's performance. It is hard to justify further stock repurchase, but they are doing it. I was just hoping for a more forward looking perspective with this kind of result.
    Reply
  •  
    Aug 02 08:50 PM
    Sun cannot compete with Dell. Period.
    Reply
  •  
    Aug 03 11:57 AM
    Take a deep breath and relax you purveyors of doom and gloom . I see people posting the inevitable demise of SUN as if they were wishing it to be true . The fact is that SUN is profitable and always has been . I can only remember 1 quarter in the last 10 years where they were not cash flow positive . All this going bankrupt talk is just pure hooey . Sun is spinning off about 1.3 billion in free cash flow on a yearly basis . Companies do not go bankrupt with 4 billion in cash and with positive cash flow in the billions . The stock buyback will be huge because of the low stock price . At current price they will be able to buy back about 1/7th of the outstanding shares . Of course this will lower the PE and lessen the dilution . They are growing worldwide and like other companies relying on the US economy they are seeing their customers hold back on capital expenditure . So when the US economy bounces back, as we all know it will, they will be there ready to grow US sales again . Proprietary software will die and SUN's open source initiative will prove to be wise . Why would you want to be locked into a vendor or OS when you can have your choice and be indemnified against lawsuits . Dell has nothing but fast food computers . They offer nothing but cheap hardware without any innovation . What was the last time DELL had any innovative offering ? Time to buy JAVA !
    Reply
  •  
    Aug 03 12:25 PM
    Sun going bankrupt is a paper tiger. The problem is that they need to get this company moving or it will be a very attractive take-over target. Laying off most of the sales force and doing stock repurchase don't increase market capitalization unless they are coupled to other actions. Those actions may make it easier to sell the company to someone else, though.


    On Aug 03 11:57 AM Optimistic Investor wrote:

    > Take a deep breath and relax you purveyors of doom and gloom . I
    > see people posting the inevitable demise of SUN as if they were wishing
    > it to be true . The fact is that SUN is profitable and always has
    > been . I can only remember 1 quarter in the last 10 years where they
    > were not cash flow positive . All this going bankrupt talk is just
    > pure hooey . Sun is spinning off about 1.3 billion in free cash flow
    > on a yearly basis . Companies do not go bankrupt with 4 billion in
    > cash and with positive cash flow in the billions . The stock buyback
    > will be huge because of the low stock price . At current price they
    > will be able to buy back about 1/7th of the outstanding shares .
    > Of course this will lower the PE and lessen the dilution . They are
    > growing worldwide and like other companies relying on the US economy
    > they are seeing their customers hold back on capital expenditure
    > . So when the US economy bounces back, as we all know it will, they
    > will be there ready to grow US sales again . Proprietary software
    > will die and SUN's open source initiative will prove to be wise .
    > Why would you want to be locked into a vendor or OS when you can
    > have your choice and be indemnified against lawsuits . Dell has
    > nothing but fast food computers . They offer nothing but cheap hardware
    > without any innovation . What was the last time DELL had any innovative
    > offering ? Time to buy JAVA !
    Reply
  •  
    Aug 04 05:08 PM
    Sun went down again today. The stock is now down 49% YTD. We want this stock to go up. If JAVA has become a slow-growth company that is exposed to sudden technology changes, then it isn't worth a high P/E. That could mean that it needs to go down to $7 until the growth issues are resolved. I don't know if the CxOs at Sun can whether JAVA at those levels for very long. One way or another, Sun will need to shake off this malaise and establish value for its investors. If they don't ...
    Reply
  •  
    Aug 04 05:10 PM
    weather (not whether), sorry.
    Reply
  •  
    Aug 07 11:59 AM
    Sun is like a college campus: full of great ideas and poor execution when it comes to finished goods in exchange for revenue. Inevitably, some products will be and are successful keeping them afloat. On the conceptual and strategic levels, Sun has way too many empty suits who keep making pronouncements with no grounding in facts. This empty talk is counter productive, confusing and annoying to Sun's customers and its own sales force. It is also a cost ballast that can be jettisoned. The “iPod moment” dreamt of by McNealy will probably never come with so much loose talk and so little to show for it in terms of easy to sell mass market appeal. That is not the way Apple's wonder works in the marketplace today.
    Sun has a great engineering and great brand recognition. Open source is a good idea perhaps, but it won't work without leadership which Sun lacks. Open storage likewise is a good idea but it will bring low gross margins and too much emphasis on this market niche will erode sales of high end systems, which will further erode margins.
    I think that the best thing to happen for Sun is for it too shut up and put out some finished products. Then it can validate its approach to open components - software, systems, storage - to be used to built bullet proof complex IT infrastructures.
    Reply
More Comments on JAVA »
More by Larry Dignan

Investment Resources
Money Management 

Research 

Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Earnings 

Enterprise Storage 

Enterprise Software 

Application Software