FOOL PLATE SPECIAL
An Investment Opinion
by Matt Richey
Putting the Dollar in Dot.com
Sun Microsystems (Nasdaq: SUNW) reported
strong earnings after the bell last night, turning in
fourth quarter profits of $0.48 per diluted share, up
30% from a year ago and two cents ahead of
estimates. The company's aggressive "dot in dot.com"
marketing campaign has made Sun a mindshare
leader in high-end hardware and services offerings for
Internet development and connectivity. The company
now bills itself as a "pure play Internet computing
company." Such a description may not be too
far-fetched, considering that Sun equipment is now
used by 15 of the top 20 Internet Service Providers
(ISPs) and runs 80% of Internet backbone traffic,
according to Goldman Sachs research.
During Q4, revenues grew faster than expected,
rising 22% over what was a strong year-ago quarter.
Product revenues grew by a healthy 20%, but the
real action was in the enterprise service arena, which
experienced a 38% jump in revenues. Sun's e-commerce services are
booming as companies scramble to get "dot.comed." More than half of the
quarter's new hires were in services, and the overall workforce expanded by
13% for the year.
For Sun, fiscal 1999 was a record year by a number of metrics, and
management was "very pleased" with both business growth and operational
efficiency. Revenues reached an all-time high of $11.7 billion, up 20% from
the prior year and once again paced by 38% growth in enterprise services.
For the past five years, Sun has grown its revenues at a compound annual rate
of 20%. Management attributes much of that growth to gains in market share,
especially against primary competitors IBM and Hewlett-Packard.
Moving down the income statement, SG&A expenses were held in check,
rising only 14%. Spending for research and development (R&D) increased
14% as well, to $1.3 billion, or 11% of revenues. All R&D spending is now
focused on "products and disruptive technologies for this new Internet age."
Sun chairman and CEO Scott McNealy opined that "effectiveness on the
return for our R&D dollar is second to none." Even as Sun invests aggressively
in its future, today's bottom-line is in great shape. Excluding acquisition-related
charges, fiscal year diluted earnings per share increased 23% to $1.42. Net
margins were up to 9.9%, having increased steadily over the past decade from
only 3.4% in 1989.
The income statement's strong results are confirmed on the balance sheet.
CFO Michael Lehman rightly noted that there are "improvements in just about
every balance sheet metric you can point to." Most noteworthy was the 11%
decline in year-over-year inventory levels. Days in inventory declined from
30.1 to 20.9, leading to a 22% improvement in the cash conversion cycle
(number of days for cash to move through a complete product cycle), which
now stands at 44.5 days. Net cash (cash minus total debt) now stands at $2.2
billion -- an increase of $1.1 billion in the past year. In fact, the increase in net
cash actually surpasses annual reported net income of $1.03 billion.
Even with an increasingly cash-rich balance sheet, during Q4 the company
enacted a shelf-registration for up to $4 billion in debt or other securities due
to the expanding array of investment opportunities within the industry. CFO
Lehman stated, "There's no question that the business of e-commerce and
service providers continues to expand, and that bodes well for us." The shift to
e-business is clearly playing into Sun's core strengths of industrial-grade
computing and the services to put it in place. Accelerating revenues, rising
profit margins, and an improving balance sheet make Sun Microsystems an
interesting prospect at 40x fiscal 2000 earnings estimates of $1.67 per share,
according to First Call. |
