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MARCH 11, 2004
By Jim Kerstetter Sun: Darkest Before the Dawn? While CEO Scott McNealy swears new products will guarantee his outfit's solid future, only sales and profits can banish Wall Street's doubts The bad news keeps piling up for Sun Microsystems Inc. On Mar. 5, Standard & Poor's reduced Sun's (SUNW ) debt rating to junk status, citing uncertainty about the Silicon Valley computer giant's ability to generate profits. Sun's stock predictably tumbled, down 11% in the two trading days after receiving the junk tag. Then came a second Wall Street analyst's downgrade, and Sun's stock closed at $4.35 on Mar. 10, down 16% since the S&P report. That's off a 52-week high of $5.93 a share in February, with its 52-week low at $3.07 last September. Clearly, the brief truce between Sun and its tormentors on Wall Street is over. Since Sun revenues started a two-year slide, financial analysts have relentlessly criticized CEO Scott McNealy's reluctance to make big payroll cuts and his outfit's inability to produce consistent profits. S&P put Sun on its CreditWatch list for exactly that reason in October -- waiting for signs that McNealy can keep the company consistently in the black. RAYS OF HOPE. Those signs have yet to materialize, while the gloomy news continues. In February, a report from market researcher Gartner said Sun's server sales fell 15% to $5.4 billion in 2003. That followed a Jan. 29 survey by Merrill Lynch of 75 CIOs that found 65% don't believe Sun can turn it around. For its part, Sun says the concerns are overblown. After all, its execs say, this is company with more than $5.1 billion in cash and short- term investments -- not exactly an indication of an outfit on the verge of ruin. There are still reasons to be optimistic about Sun. For all the bad server news in 2003, Sun execs point to market researcher IDC's fourth-quarter factory tracker numbers that show the company made some progress late in the year. Sun's factory revenues grew 20.3% sequentially, and unit sales, thanks to increased low-end server sales, were up 21.3% from a year ago. On the high end -- servers that cost $500,000 or more -- unit sales were up 15.5%, and Sun gained 3.1% share. Also, sales of servers costing less than $25,000 were up 37.1%. With a range of new server products on tap for 2004, Sun needs improved sales and marketing execution to get back on track. In the last 12 months, the company has unveiled low-end server lines that run on Intel-chip and Linux operating systems, Intel chips and Sun's own Solaris operating systems, and AMD-made Opteron chips that run both Solaris and Linux. Is there one big savior? No. But Sun execs hope there will be lots of little saviors tied together by increasing software sales (see BW, 3/22/04, "Servers: More Bells And Whistles, Please"). TOO LATE? McNealy & Co. know it's a tough road ahead. They admit they were slow off the mark on the low-end business because "they had to learn" the business, says Neil Knox, executive vice-president of volume systems products at Sun. Now that they have all those products in place, they know they have to produce. "I am focused on revenues this year," McNealy said at an analyst conference last month. At the end of March, all eyes will be watching to see whether customers embrace the first of Sun's servers based on the outfit's so-called throughput chips. The first generation of these chips can increase data processing by 80%, according to some estimates. Most important, they are a sign that Sun hasn't given up on what it has always done best -- innovating. Wall Street is waiting to see if customers are willing to embrace that innovation.  Kerstetter covers Sun from the San Mateo bureau of BusinessWeek Edited by Douglas Harbrecht
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