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Technology Stocks : All About Sun Microsystems -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Haegin who wrote (7025)	1/20/1998 3:46:00 AM
From: Holger Johannsen	Read Replies (1) \| Respond to of 64865

Here is the report from Lehman. I post it here because it is only available for a short period of time in their website. Headline: Sun Microsystems: Strong Q2 Results; Raising Estimates Author: George D. Elling, CFA 1(212)526-3823, Lou Miscioscia 526-3472 Rating: 1 Company: SUNW Country: COM CUS Industry: COMPUT Ticker : SUNW Rank(Prev): 1-Buy Rank(Curr): 1-Buy Price : $43 52wk Range: $53-26 Price Target: $55 Today's Date : 01/16/98 Fiscal Year : JUN ------------------------------------------------------------------------------ EPS 1997 1998 1999 2000 QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.32A 0.41A 0.41A - -E - -E - -E - -E 2nd: 0.46A 0.55E 0.57A - -E - -E - -E - -E 3rd: 0.51A 0.56E 0.60E - -E - -E - -E - -E 4th: 0.61A 0.70E 0.72E - -E - -E - -E - -E ------------------------------------------------------------------------------ Year:$ 1.90A $ 2.22E $ 2.30E $ - -E $ 2.75E $ - -E $ - -E Street Est.: $ 2.26E $ 2.27E $ 2.72E $ 2.74E $ - -E $ - -E ------------------------------------------------------------------------------ Price (As of 1/15): $43 Revenue (1998): 10.0 Bil. Return On Equity (98): 27.4 % Proj. 5yr EPS Grth: 18.0 % Shares Outstanding: 393.0 Mil. Dividend Yield: N/A Mkt Capitalization: 16.63 Bil. P/E 1998; 1999 : 18.7 X; 15.6 X Current Book Value: $7.25 /sh Convertible: None Debt-to-Capital: 4.1 % Disclosure(s): C ------------------------------------------------------------------------------ * Following a disappointing first quarter, Sun reported strong second quarter results with earnings and revenues exceeding our expectations. * In the second quarter, total revenues gained 17.7% to $2.45 B, exceeding our expectations of $2.40 B. Despite a currency impact of 4 percentage points Sun was able to deliver favorable revenues as the US, and Europe showed good gains. * Reported earnings of $0.57 per share exceeded our $0.55 per share expectation, and First Call consensus of $0.54. Earnings gained 25% compared with the $0.46 per share reported a year ago. * Although numerous uncertainties exist, including the Asian situation, and possible Asian flu ripple effects, Sun has several major new products including the recently introduced Darwin (low end workstations) and PersonalJava 1.0. * Overall we are encouraged by momentum in key markets such as the Enterprise and Internet areas. We are modestly raising our FY est. to $2.30/shr from our prior est. of $2.20-$2.25/shr. Our Q3 est calls for earnings of $0.60/shr vs. $0.51/shr a year ago. We are initiating an EPS est of $2.75 for FY99. We believe Sun is well positioned strategically and maintain our 1 Buy rating on the stock. Our price target is $55 per share. ------------------------------------------------------------------------------ QUARTERLY HIGHLIGHTS Strong Revenue Gains. Despite worldwide economic uncertainties Sun reported strong revenue gains of 17.7 % to $ 2.45 billion. The company saw favorable gains in several key geography's including the US, which continued a string of strong gains. Following a disappointing first quarter in which European growth was only 6%, the company's European operation jumped 22% in the second quarter. As was the case in the prior quarter the Asian Pacific market gained only modestly with Japan down 4% in dollar terms, although it increased modestly in yen. Management indicated that currency had a 4 percentage point impact on revenues in the quarter, thus overall revenues would have gained 22%, in constant currency. Earnings Gain 25%. Quarterly net income from operations gained 25% to $223 million, or $0.57 per share, compared with the previous year's $0.46 per share. This result was above our $0.55 per share expectation and First Call consensus of $0.54 per share. Overall earnings were aided by continued strong gross margin trends. Overall Bookings Strong. Net bookings in the quarter gained 19.6% to $2,566 million, which was another strong result. Bookings would have been 4% points higher in constant currency. Book to bill exceeded 1 in the quarter and backlog was $465 million, up 33% sequentially, but flat year over year. Product Momentum. Overall the company has seen favorable demand for its enterprise servers and demand appears to be building for its new enterprise workgroup 450 which was announced in August. We expect the new Darwin workstation series to enhance backlog. We are also optimistic about the potential for the new storage announcement, which we expect on January 28. Starfire Sales Strong. Particularly strong demand was seen for Sun's high-end server, the Enterprise 10000 Starfire. Overall the company shipped more than 100 in the quarter which was a significant improvement over shipments in the prior quarter. Salesmen we have contacted indicate continued strong demand for this product. Distribution Channels Improve. In the September quarter, distributors missed their targets and some stuffing of the channel occurred. In the December quarter, overall demand was favorable from the channels, with no late quarter heroics having taken place. In addition, little, if any, channel stuffing occurred. Worldwide Demand. Geographically, US revenues gained 19.4% to $1,223 million in the quarter and represented 50% of total revenues. European revenues were again affected by currencies but still showed gains of 22.3% to $688 million which represented 28% of the total. Overall, Japan returned a reasonable performance in yen. However, when translated into dollars, Japanese revenue declined 4% to $248 million or roughly 12% of revenues. The rest of the world showed strong growth of 23% to $290 million or 12% of the total. Gross Margins Remain Strong. Reflecting a positive shift to a richer mix of products (servers) Sun once again reported strong gross margins in the quarter. Gross margins were 52.2%, an increase of over 1% point sequentially and almost 2% points year over year. Strong margins reflect a higher level of server shipments to both enterprise and Internet markets. We look for gross margins trends to move lower as the company attempts to exploit its new low-end workstations, which have been aggressively priced to regain marketshare in the low end of the marketplace. Balance Sheet Solid. Sun maintains a strong balance sheet with cash balances currently totaling $902 million and a book value of $8.08 per share. Flexible Field Offices to Aid Operating Expenditures. As we indicated following last quarter's earnings report, Sun is in the process of establishing a number of flexible field offices which we believe will begin to positively impact SG&A spending. The company is in the process of establishing several of these offices with Atlanta being the first location. Currently, the company has 198 sales offices, of which 68 have less than 10 people. By reducing the number of these offices Sun will be in a much better position to reduce overall expenditures by having sales people working out of their homes or on the road. Acquisition Charges. Sun took $110 million in charges in the quarter for acquisitions of Encore Computer's storage products business and for Chorus Systems S.A. When these charges are included, net income would be $149 million and EPS totaled $0.38. These are one time write-offs. Looking Ahead. Sun has proven its ability to compete in all facets of the computer industry and its innovative strategies including the network is the computer and its pioneering of Java, have allowed the company to gain strong footholds in key market segments. In our view, Sun should continue to gain momentum in the enterprise world and the company has an ability now to fend off Microsoft Windows NT in the low-end workstation arenas with its recent introduction of Darwin. Nonetheless, the battle between Unix and NT will toughen over time with clustering technology for NT allowing that operating system to begin to compete in the mid and higher-end server arena. Although Wolfpack has been delayed, we still expect it to become a viable technology by the latter part of 1998. Sun must demonstrate an ability to maintain its competitive edge versus NT by broadening its Solaris appeal, and by better exploiting market opportunities within the Internet environment. We believe product thrust such as the Enterprise 450, Starfire and now Darwin all provide attractive opportunities and we shall monitor the company's momentum. Although its lawsuit with Microsoft could muddy the water somewhat, we believe opportunities still abound. BUSINESS DESCRIPTION: Sun Microsystems, with fiscal 1997 revenue of $8.6 billion is a leading provider of client/server- based network solutions. International revenues represent approximately 51% of total revenues. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities.