By Jim Kerstetter There's no rosy scenario for this one: Sun Microsystems' most recent quarter was a disappointment. Sure, the long-troubled company turned a $19 million profit in the fiscal quarter that ended in December -- nothing wrong with that. But revenues were $2.84 billion, down 1.6% from a year ago and below consensus Wall Street expectations.
Coming after two quarters of welcome revenue growth, investors were understandably displeased. Shares of Sun (SUNW) dropped 7.86%, to $4.22, on Jan. 14, the day after earnings were announced. "Sun's results disappointed on one too many fronts, setting Sun back even amid mild glimmers of progress, including renewed interest among some Wall Street accounts," wrote Goldman Sachs research analyst Laura Conigliaro in a report.
Conigliaro has a point. Sun had a surprisingly good time of it on Wall Street in the second half of 2004 as its share price was up more than 60% over the second half. Much of that buying was based on two consecutive quarters of year-over-year revenue growth, a happy change after 12 straight quarters of declines. But as rumors spread that the last quarter wasn't as great as some had hoped, investors backed away. The stock was down 15% this year, even before the earnings report on Jan. 13.
SUBSCRIPTIONS AND CASH. Does that mean it's time to sell? Depends on your investment outlook. If you're looking short-term, Sun is probably the wrong company. Few analysts expect its shares to do more than tread water for the next few quarters. Plenty of cost-cutting remains to be done, and Sun is just now starting to get traction with new products such as Solaris 10, the flagship operating system, and low-price computer servers based on Advanced Micro Device's (AMD) Opteron computer chip. Building those products into strong revenue drivers is going to take quarters, if not years.
Also, CEO Scott McNealy's plans to move toward a more subscription-based business model means some sales will be reflected over the life of a contract, rather than in an up-front payment. That, however, makes Sun a much more interesting proposition over the long term.
This is still a company with $7.5 billion in cash and short-term investments, and McNealy hinted in the earnings call that Sun is finally thinking about doing something with that massive war chest, either by making significant acquisitions or buying back shares. "We're going to continue to explore what we can do and how we can put that to work," McNealy told analysts.
LITTLE PROFITS. McNealy & Co. are ready to make the hard choices they seemed reluctant about a year ago. Operating expenses in the most recent quarter were down 10.5% from last year, and that's not the end. Conigliaro believes expenses for the fiscal year that ends in June will be down nearly 13% from the year before. That will allow Sun to keep turning those little profits that build up the cash position.
With their recent slide on Wall Street, the shares are reasonably priced. Is Sun for all investors? No way. But if your horizon is long enough, it's intriguing to watch. Kerstetter is Technology editor for BusinessWeek Online in San Mateo, Calif.