Foolish Forecast: Sun Opens to New Realms

"Keep your splendid, silent sun;
Keep your woods, O Nature, and the quiet places by the woods;
Keep your fields of clover and timothy, and your corn-fields and orchards;
Keep the blossoming buckwheat fields, where the Ninth-month bees hum;
Give me faces and streets -- give me these phantoms incessant and endless along the trottoirs!
Give me interminable eyes -- give me women -- give me comrades and lovers by the thousand!"

-- Walt Whitman, "Give me the Splendid, Silent Sun"

National Poetry Month is winding down, but Sun Microsystems (Nasdaq: SUNW  ) , long shunned by its customers, can relate to preferring streets full of faces over the silent solitude that it's been enduring for several years. The company reports third-quarter earnings on Tuesday night, so don your shades -- we're about to look right into the Sun, and it may finally be getting brighter.

What analysts say:

  • Buy, sell, or waffle? Twenty analyst firms follow Sun today. Six of them are buying, and five are selling; the other nine are holding the middle ground. In our Motley Fool CAPS investor community, Sun is a perennial two-star stock, based on about 780 user ratings at the latest count.
  • Revenues. The average analyst should be satisfied with $3.4 billion, representing about 7.7% growth from the year-ago $3.18 billion take. It's also the midpoint of management's $70 million guidance range.
  • Earnings. The average forecast calls for a $0.01 profit per share, up from a $0.06 loss per share last year. We get no firm earnings guidance, but management comments work out to a breakeven quarter on an operational basis, give or take about $70 million.

What management says:
A few months ago, Sun finally gave in to pressure from the developer community and released its Java programming language under the open-source GPL license. In the most recent earnings call, CEO Jonathan Schwartz said the GPL release of all the core technologies in Java opened the platform up to significant new projects. He held up the mobile email applications for both Yahoo! (Nasdaq: YHOO  ) Mail and Google (Nasdaq: GOOG  ) Gmail as major Java wins on that basis.

What management does:
At the end of 2005, Sun appeared to be dead in the water, with years of unerring quarterly losses in the rearview mirror and revenues growing about as quickly as fruitcake decomposes -- i.e., not at all.

But then something happened to that top line. Now, a steady stream of double-digit growth periods is accompanied by the first quarterly profit in four years, in the latest quarter. What happened? We'll pick up on that trail after these tables.

Margins

9/2005

12/2005

3/2006

6/2006

10/2006

12/2006

Gross

42.8%

43.0%

43.4%

43.4%

43.3%

43.9%

Operating

(0.6%)

(1.8%)

(1.9%)

(1.8%)

(1.5%)

0.7%

Net

(0.9%)

(2.8%)

(4.2%)

(6.6%)

(5.9%)

(3.2%)

FCF/Revenue

1.1%

(0.9%)

0.8%

1.9%

1.6%

4.7%

YOY Growth

9/2005

12/2005

3/2006

6/2006

10/2006

12/2006

Revenue

(1.0%)

3.9%

9.0%

18.0%

21.2%

18.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Java has had a good run as a locked-down, proprietary platform, but opening up the code itself should pour some gasoline on the fire. After all, that's what happened to the Solaris operating system when Sun decided to open it up; as it's no longer tied to Sun SPARC hardware or to the company's occasional nod to x86 machines, you can now run production-level Solaris servers on hardware from competitors such as Hewlett-Packard (NYSE: HPQ  ) or Dell (Nasdaq: DELL  ) , with processors from Intel (Nasdaq: INTC  ) or AMD (NYSE: AMD  ) inside.

What a novel idea -- harness the enthusiasm, manpower, and expertise of your entire customer base rather than micromanage your most valuable intellectual properties. Open platforms supported with open arms can do amazing things -- it's how IBM became the dominant system builder in the early days of the PC, picking standard parts off the shelf, and it appears to be working again for Sun. I'd draw parallels to the current state of the entertainment industry here, but that's fodder for a much longer article.

Dell and Intel are two of our Motley Fool Inside Value picks; Dell and Yahoo! share a space in the Motley Fool Stock Advisor newsletter. Read all about it with a couple of free 30-day trial subscriptions.

Fool contributor Anders Bylund is an AMD shareholder but holds no other position in any of the companies discussed here. He did make a living out of Sun support for four years, though. You can check out Anders' holdings if you like, and Foolish disclosure will help you find the road ahead.


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