Sun Microsystems (NASDAQ:SUNW) is keeping a high profile lately. Just days before reporting earnings for the second quarter of fiscal 2007, the server specialist announced a big supply deal with Intel (NASDAQ:INTC). This Fool is here to help you make sense of the whole shebang.

What analysts say:

  • Buy, sell, or waffle? Wall Street stands divided on upcoming Sun earnings, with four analysts each on the buy and sell sides, and 13 holding their horses in between. In Motley Fool CAPS, it's a two-star stock with 520 ratings from our players.
  • Revenues. Analysts expect a 5.4% revenue gain, on average, to $3.52 billion.
  • Earnings. Sun should present a small profit this time, according to estimates. $0.01 per share would satisfy the Street, and mark a significant improvement over the $0.07-per-share loss last year.

What management says:
CEO Jonathan Schwartz introduced the Intel partnership yesterday with a nod to future opportunities: "This is a way of making our R&D more efficient. We are not interested in capping R&D; we look at the return on R&D. Sun simply delivering Sparc or AMD (NYSE:AMD) systems misses a big opportunity."

I like the idea of measuring returns on R&D expenses, as that surely is the lifeblood of any tech operation. In the first-quarter earnings call, Schwartz also said that the company is on track to achieve a 4% target on operating margins in the fourth quarter, and 10% beyond this fiscal year.

What management does:
OK, take another quarter to reach that operating margins goal, Jonathan. The last two quarters saw positive but very slim margins there, around 0.5% each. Gross margins are commendably stable and sales have started to take off in a serious way, but trailing return on equity and net margin are suffering from more than $260 million of goodwill impairment and restructuring charges in Q4 2006.

Margins

6/05

10/05

12/05

3/06

6/06

10/06

Gross

42.0%

42.8%

43.0%

43.4%

43.4%

43.3%

Oper.

(0.5%)

(0.6%)

(1.8%)

(1.9%)

(1.8%)

(1.5%)

Net

(1.0%)

(0.9%)

(2.8%)

(4.2%)

(6.6%)

(5.9%)

FCF/Revenue

6.5%

7.3%

4.8%

6.1%

7.9%

6.9%


6/05

10/05

12/05

3/06

6/06

10/06

ROE

(1.6%)

(1.5%)

(5.0%)

(7.9%)

(13.3%)

(12.2%)

YOY Revenue Growth

(1.0%)

(1.0%)

3.9%

9.0%

18.0%

21.2%
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:
A year ago, it looked like the Sun was setting and the company had lost its way in the increasingly competitive server market. IBM (NYSE:IBM) and Dell (NASDAQ:DELL) were eating Sun's lunch on the hardware side, while Big Blue, Microsoft (NASDAQ:MSFT), and even Red Hat (NYSE:RHT) were stealing its software market share.

But Sun got back into gear with a strong product lineup, a powerful but free-of-charge Solaris 10 for Intel and AMD servers, and steps taken toward open-sourcing the Java platform. Many of these things had been anathema to Sun for years, despite customers clamoring for access to some source code, but the results of listening to your users speak for themselves, I think.

Intel, Dell, and Microsoft are all Motley Fool Inside Value selections, and Dell is also a Motley Fool Stock Advisor pick. Grab a free 30-day trial or two to find out more.

Fool contributor Anders Bylund is an AMD shareholder, but holds no other position in any of the companies discussed here. He did spend five years on the front lines as a Sun and Red Hat admin. You can check out Anders' holdings if you like, and Foolish disclosure is good for what ails ya.