Questions Of Sun's Viability, Relevance Getting Louder As Losses, Layoffs Loom
BY MURRAY COLEMAN
Investor's Business Daily
Wednesday October 16, 10:48 am ET
Sun Microsystems <sunw.O> used to call itself "the dot in dot-com."
Now, says Chief Executive Scott McNealy, just call it the "o" in old economy.
Sun has lost money in three of the last four quarters. Those losses are expected to continue when it reports first-quarter results Thursday. Wall Street is estimating Sun will wind up losing 4 cents a share.
More ominous, McNealy feels compelled to address concerns over Sun's long-term viability.
On Tuesday, Merrill Lynch said in a research note Sun may cut up to 8,000 jobs this quarter. That would be about 20% of its work force. At a Gartner Inc. conference last week, McNealy said that if the firm isn't profitable, he may make cuts.
Analyst Steven Milunovich added, the "sense of urgency probably has been heightened by customer questions about Sun's viability."
But pointing to Sun's cash balance of $6 billion and its $10 billion in annual sales, Milunovich wrote, "We believe the real question is not viability but relevance."
Still, at a technology conference in Florida, McNealy was forced to reinforce his claim that Sun remains a viable tech player.
Sun has been hit especially hard, says Charles King, a Sageza Group analyst. "Everyone in tech has taken their lumps lately," he said "But that's been especially true for Sun. It's almost shocking how far they've fallen."
The 95% Drop
In the summer of 2000, shares of Sun soared past 64. Now, they're trading around 3. That's 95% off the high. That means a dollar invested then is worth 5 cents today.
The stock price of other big tech firms, such as Cisco and Intel, also got hit during the spending downturn. But neither has slipped below 3, as Sun has in recent weeks. When companies sink to the low single digits, they risk being bumped from Standard & Poor's 500 index.
Of course, the committee that makes such decisions about the S&P index isn't talking. But, said Mark Specker, a SoundView Technology analyst, "Standard & Poor's looks at more than just how far someone's market cap has fallen. It would be hard to imagine a broadly based S&P 500 without Sun in its future to help represent tech."
And Rick Ferri, an investment manager at Portfolio Solutions LLC, points out Lucent Technologies, trading at less than 1, is still included in the index. Portfolio Solutions, based in Troy, Mich., manages a $130 million portfolio that includes funds with Sun shares. "The S&P doesn't have automatic cut-off signals like many other indexes," said Ferri. "It has an investment committee to interject a human element into the formula."
Certainly, part of Sun's problem can be traced to its customers' troubles. For instance, Lucent, one of Sun's big clients in the dot-com boom, has lost money for the last seven quarters and has gone through massive layoffs.
Analysts point out that Sun isn't the only firm whose customers aren't buying much these days. "Sun's woes aren't unique," said Jim Garden, a Technology Business Research analyst. "But they did sell a lot of equipment to Lucent and the other telcos during the tech boom."
How dour is Sun's position? "They certainly have some severe short- and midterm problems," said SoundView's Specker. But he says with nearly $6 billion in cash and little debt, "they're in no real danger of going out of business."
So how did it get into such a mess?
Some critics say McNealy is running a bloated company. Other analysts blame strategic mistakes.
"They were caught trying to do too many things without a cohesive strategy," said Mary Cicalese, an analyst at MirrorPoint Research Group. "The factors that helped Sun climb to the top worked against them once the downturn came."
With its earnings call close, Sun declined to comment about strategic and financial issues.
McNealy's led an aggressive campaign to revamp Sun's products, adding lower- and mid-range servers to the firm's line of higher-priced gear.
Sun's Solution
Sun's also taking aim at Microsoft by moving into different types of business software. And McNealy's making other strategic changes. For one, he's opening his arms to non-Sun designed chips. Another big move is to embrace Linux, a freely distributed operating system made by independent programmers. It competes against Sun's own Solaris operating system.
As a result, McNealy argues that Sun has a more diversified lineup than ever.
Still, Sun's strengths are generally considered to remain on the high end. "They're executing fine," said Dan Niles, a Lehman Bros. analyst. "It's just where they're positioned. It's a different market these days."
Microsoft and Intel are diversifying. Dell Computer Corp. is also expanding into more areas. "It's like walking into a car dealer where Sun represents a Ferrari and Dell's the Toyota," said Niles. "Both are good products. But which one do you think most people are going to buy in this kind of a market?"
Moving Too Slow?
Since Sun's shares began tumbling in late 2000, McNealy's been criticized for not downsizing enough. But those who've watched Sun's rise and fall say McNealy has his reasons for keeping the excess capacity. "Sun's management has seen how quickly the market can change," said Garden. "They want to come out of this downturn with more weapons than anyone else."
But even if Sun attracts a wider audience for its products, will it know what to do next?
"They need to decide what they want to be," said Current Analysis' Joseph Marino. "Instead of worrying about fighting Microsoft all of the time, they need to look at someone like IBM that has a full range of hardware, software and services."
Despite its poor stock performance, many analysts still rate Sun within the top tier among tech firms selling hardware and software business systems to corporate America. But that might turn out to be little comfort to beleaguered investors.
IBM and HP are clearly the market leaders, says Garden. He remains optimistic about Sun's future and still ranks it No. 3 among diversified business systems makers.
"Sun's problem in this market is that the advantage of being third is diminishing," he said. "On big projects these days, IT managers look at a primary source to buy from and a backup. Beyond that, it doesn't matter anymore." |
