Partly Cloudy Days Ahead for Sun Microsystems
By
Linda Brewton
August 6, 2008
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After reporting fourth-quarter results that were mainly in line with Wall Street expectations, Sun Microsystems (Nasdaq: JAVA) now predicts a slight decline in sales and negative earnings per share for its current quarter. Management further stated that the business environment would be challenging for at least another six months. The venerable Unix vendor's quarterly recap stood in stark contrast to the rather glowing results IBM (NYSE: IBM) posted only two weeks prior, when it raised annual EPS guidance by another $0.25.
Weak enterprise spending in the U.S., where Sun derives 40% of its revenue, led to sluggish results in the June-ended quarter, especially in the telecom, financial, and government sectors. These results echoed commentary earlier this year by Dell (Nasdaq: DELL), which derives nearly 50% of its revenue from the U.S. By contrast, IBM and Hewlett-Packard (NYSE: HPQ), with their respective 37% and 30% exposure to the U.S., appeared immune to any pullback in domestic IT spending levels.
Compounding the decline in Sun's top line was a shift toward lower-margin products, which led to a 2.9% decline in product gross margin versus last year's fourth quarter. Additional operating expenses associated with hiring 200 new sales reps in the quarter contributed to lower operating margin and a year-over-year decline in operating cash flow.
On the bright side, Sun noted healthy growth in the emerging markets of Brazil, Russia, India, and China and robust demand for its open source solutions, especially its new open storage products. Given their relatively minor contribution to Sun's overall revenue, though, growth in these areas will not be enough to offset the short-term challenges in the rest of the business. Following a price drop after the earnings release, Sun shares might be tempting to some investors. However, bargain buyers should note that the company's growth initiatives and ongoing restructuring efforts will take some time to play out.
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