Sun Microsystems Warns Investors Of Possible Trouble in Second Half
An INTERACTIVE JOURNAL News Roundup
Sun Microsystems Inc. shares took a spill Friday after the company's earnings exceeded Wall Street expectations for the third quarter but issued a cautious outlook for the rest of 1999.
"Clearly the earnings were great," said Lehman Brothers Inc. analyst George Elling. But Sun's cautioning that year-2000 issues could slow growth later this year spooked investors, he said.
Late Thursday, the Palo Alto, Calif., computer maker said net income in the fiscal third quarter ended March 28 rose 13% to $261.2 million, or 63 cents per diluted share, from $232 million, or 59 cents a share, in the year-earlier quarter. Those figures include acquisition-related charges in the just-ended fiscal quarter to distinguish from year-earlier of $28.7 million and a related $10.9 million income-tax provision, and aren't adjusted for a recent 2-for-1 stock split.
Excluding acquisition-related charges, Sun's earnings rose to $291.4 million, or 71 cents a share, up 26% from $232 million, or 59 cents a share, a year earlier. Analysts had expected earnings of 70 cents a share on a pre-split basis, according to First Call.
Revenue soared, rising 24% to $2.94 billion from $2.36 billion a year earlier. Analysts had expected sales growth of only 20% to 21% in the quarter.
In a Thursday-night conference call, Sun, like Intel Corp. earlier this week, talked about uncertainties in the market in the second half of the year. Sun officials, who are traditionally cautious with Wall Street, cited worries that corporations will curtail spending on computers because of the year-2000 glitch.
The news sent shares of Sun down $5.50 to $54.9375 in trading on the Nasdaq Stock Market Friday after falling $2.125 in trading Thursday and showing weakness in after-hours trading.
Analysts React to Cautions
Sun's numbers generally pleased analysts, particularly the company's ability to pile up higher sales at a time when many technology companies are seeing revenue growth sag. But the company's cautionary note -- and the possibility that its stock may be overheated -- had a different effect.
Early Friday, Merrill Lynch & Co. analyst Steve Milunovich lowered his near-term rating on Sun to "accumulate" from "buy," citing the company's valuation.
"The stock has about tripled in the last seven months," Mr. Milunovich wrote in a research note. "We would get more positive at a lower price or at a later time."
Jay Stevens, an analyst at Buckingham Research, said he wasn't terribly concerned about Sun's cautious outlook.
"The truth of the matter is no one seems to know" how the year-2000 glitch will affect corporate spending on computers, Mr. Stevens said. "But we do know one thing: This ends January 1, 2000. For investors, this means for the next eight months you get an opportunity to buy a stock you like for cheaper."
Mr. Stevens reiterated his "buy" rating on Sun stock.
He noted that Sun hired 1,300 people in the third quarter, indicating that the company isn't as worried as it let on. "Watch what they do as well as what they say," he said.
In the last six months or so, Sun shares have soared -- achieving a far higher valuation than the company's competitors International Business Machines Corp. and Hewlett-Packard Co. Its alliance with America Online Inc., meanwhile, has further linked Sun to the Internet in investors' minds.
Performance Pleases Analysts
On Thursday, Sun Chief Executive Scott McNealy presented the possibility of near-term trouble in the industry as a long-term positive for his company.
"We are heading into what we call Heartbreak Hill, and it's going to look a little ugly across the industry," he said, adding that Sun hopes to press its competitors harder during any industry turmoil. "We like Heartbreak Hill -- that's where you win during a marathon."
Michael Lehman, Sun's chief financial officer, said he expected revenue growth in the current quarter to continue at a rate of roughly 18% to 19%, and warned analysts that they might want be more conservative in their profit estimates for Sun in the second half of 1999. He declined to make more specific forecasts related to Y2K or any other issues.
"Over a six to nine-month period, there is a fair amount of uncertainty," Mr. Lehman said. "But we can't say much about factors we can't control, like Y2K."
"Mike Lehman has a very conservative streak in his background," said John Jones, an analyst with Salomon Smith Barney. But he added that Sun was being "appropriately cautious, given that no one knows what will happen."
Sun's business certainly doesn't look likely to suffer in the near term. Mr. Lehman said that orders in the quarter grew 22%, a strong indicator that Sun continues to hold its own in the fast-moving server market. What's more, Sun has also benefited from growing signs of recovery in Asia; it said sales in Japan, one of its largest markets outside the U.S., grew 35% in the quarter.
Sun, the only major computer maker to reject a move toward building systems using Intel microprocessors, also announced a milestone in its development of its own next-generation systems with the "tape-out," or final design, of its UltraSparc-III microprocessor. Sun expects to ship systems based on the new chip in roughly a year, officials said. |
