Thursday night, veteran Unix systems and software maker Sun Microsystems (NASDAQ:SUNW) is set to report earnings for the first quarter of its fiscal 2007. One Fool is here to give you a sense of where the business is heading.

What analysts say:

  • Buy, sell, or waffle? Twenty-one Wall Street analysts follow Sun these days. Six of them have a buy rating on the stock, four say sell, and the remaining 11 are straddling the fence with a hold. It's a resounding "we don't know" consensus. In the Motley Fool CAPS service, 26 of our all-star stock pickers are bullish on Sun, while 12 of their peers are on the bear side.
  • Revenues. The analyst consensus calls for revenue growth of 17%, to $3.2 billion.
  • Earnings. Last year, Sun reported a net loss of $0.02 per share in the first quarter. This time, Wall Street expects bigger losses of $0.04 per share.

What management says:
The company went through a serious restructuring effort two quarters ago, one that CEO Jonathan Schwartz calls "a top-to-bottom review of every corner of the business." The new business focus is on software rather than hardware, with Java and Solaris the new growth drivers.

"The more consumers that bank through a browser, the more banks will spend on Sun's core products," he said at the close of the last quarter. "The more Java phones there are in the market, the more carriers will invest in Sun's network infrastructure. The more e-taxes are filed, the more OnStar cars are on the road, the more Verizon (NYSE:VZ) and Vonage (NYSE:VG) grow their subscriber bases, the more auctioneers go to eBay (NASDAQ:EBAY) -- the bigger the data centers they will all require."

What management does:
Gross margins are steadily improving, which is a good thing and a sign of pricing power. But dig below the sales figures, and the wheels start to come off. Part of the net income problem in the latest period stems from the restructuring mentioned above, with $226 million of associated costs. But ROE trends indicate a deeper problem, only partly offset by the healthy revenue growth direction.

Margins %


































TTM Return on Equity







YOY Revenue Growth







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:
The balance sheet holds a few surprises as well. You may be impressed by the $1.5 billion boost in cash and cash equivalents over the past four quarters, especially since long-term debt was also halved from $1.1 billion to $575 million over the same period.

But there was also a $3.3 billion drop in long-term investment balances over the same period. Trailing free cash flow has remained positive, although just barely, giving the company a second bright spot to focus on alongside sales growth.

The Solaris operating system has been open-sourced and available for free for quite some time now, and the core Java product has always been free. The product segment is still the largest source of revenue for Sun, but services and support has provided the bigger share of operational profits for years -- call it "bigger and bigger," even, as the division's bottom-line importance is only growing.

So Schwartz is on the right track, and if he can follow through on his plans to control costs and concentrate on software and services rather than the low-margin server hardware business, there may be a future here. We'll know more after this report.


  • Red Hat (NASDAQ:RHAT)
  • International Business Machines (NYSE:IBM)
  • Novell (NASDAQ:NOVL)

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Fool contributor Anders Bylund holds no position in any of the companies discussed here, but he was a Solaris administrator for years. You can check out Anders' holdings if you like, and Foolish disclosureis always hip to the jive.