|SUNW ($5-$5.75) Sales Higher, Loss Narrower Than Expected |
By K.C. Swanson
TheStreet.com Staff Reporter
01/16/2004 10:29 AM EST
Click here for more stories by K.C. Swanson
Updated from 9:44 a.m. EST
Sun Microsystems (SUNW:Nasdaq - commentary - research) shares rose early Friday, trading as high as $5.56 in the first hour of the session, a day after the company posted a smaller than expected quarterly loss. The server and storage maker also delivered an upside surprise on revenue, though sales were still a hair below last year's levels.
At about 10:25 a.m. EST, Sun shares were up 5 cents, or 0.9%, to $5.41.
Friday morning, sell-side analysts uttered cautious praise of the recent business upturn at Sun, although executives at the company offered only the most terse commentary on their near-term outlook. As has been the case throughout much of the downturn, Sun refused to give quarterly sales or earnings guidance on the firm's conference call after the close Thursday. Company officers also pointedly declined to talk about how a stabilizing economy might help Sun.
Deutsche Securities analyst George Elling, who has a buy rating on the shares, offered some of the most upbeat comments. "We have long been believers in Sun's ability to turn itself around and in the strength of its installed base," Elling wrote Friday morning. "Management's new focus on the low end, its Linux offerings, and its willingness to develop x86 servers with AMD shows that the company is willing to address some of its previous shortcomings." (Deutsche has done recent investment banking for Sun.)
Such actions helped Sun beat revenue expectations for the quarter and "will also help the company become profitable as new products come online later this year," he added. "It's not that Sun is 'knocking the cover off the ball', but rather that is has taken a step in the right direction with strong unit growth, a positive book to bill and some recovery in key markets that had been highly depressed over the past two years, such as telecom."
But others were not yet ready to recommend the shares. "What's unclear at this time is how much of the improvement stemmed from Sun's own initiatives and how much stemmed from an improving economy," wrote Needham analyst Charlie Wolf, who currently has a hold rating on the stock. "In either case, we're becoming more positive on the story, but not enough to upgrade at this time."
If Sun's upside came mostly from the economy, he pointed out, the company will still face "the overriding challenge of a hostile competitive environment."
Still, Wolf gives Sun credit for "making up for lost time" after initially dragging its heels in the move to standards-based servers. He cut his estimate for Sun's fiscal 2004 loss to 17 cents from 25 cents and the 2005 loss to 4 cents from 21 cents.
Needham hasn't done banking for Sun, but Wolf or a member of his family has a financial interest in Sun.
On the outlook front, SG Cowen's Richard Chu said he wasn't surprised by the lack of commentary from Sun, since it hasn't given guidance for a while. "The way I see it, that would have sent too strong a signal," he said. On a sequential basis, Sun's sales growth was "encouraging," he said. "I think that proves we're in a better environment."
When a Deutsche Bank analyst noted on the call that IBM (IBM:NYSE - commentary - research) gave upbeat economic commentary in its earnings report this morning, an irritable McNealy responded, "IBM must have a lot of economists on their payroll. Maybe that's getting bundled into the price of their product. I just can't predict what economies are going to do."
But McNealy also allowed the just-reported quarter was "pretty much on track. There was some nice little upside that felt pretty good." Last summer and fall, "we were facing pretty negative press and image and karma," he added. "I think that wore off and people understand we're going to stick around. That released a lot of pent-up demand."
In its fiscal second quarter, Sun's sales amounted to $2.89 billion, down 0.9% from last year's levels but above the Wall Street consensus estimate of $2.73 billion. Those results include 5.1 percentage points of currency benefit from a weak dollar -- meaning without the currency benefit Sun would have seen revenues shrink.
But Chief Financial Officer Steve McGowan said that in terms of sequential revenue growth -- which measured 14% -- Sun had just seen the best second quarter since fiscal year 1998.
Still, the competitive situation hasn't changed, Chu added, and Sun hasn't offered any plans to reduce costs (other than a minor layoff announcement). That being the case, Sun's prospects for profitability over the next two years are "very questionable," he said. "Three months ago things were tough enough that they seemed close to perhaps making much deeper cuts. The good news is that business is getting better, but the cost of that is that I think it reduces the pressure on Sun to really do something with the business model."
Chu has a neutral rating on the stock, based on both competitive concerns and valuation. "We're in the camp that feels the stock in the very short run is levitating a little bit," he said. "People expected a better quarter and that was already in the stock." SG Cowen hasn't done banking for Sun.
In the fourth quarter, Sun saw continued demand from the government sector and renewed buying from the telecom space.
Total gross margin of 41.8% was down 1.5 percentage points from the same quarter in 2003.