Sun Tries a Software Makeover

Wall Street Says 'Show Me'

In the meantime, Sun is struggling to keep its head above water. On a per-share basis, earnings have been in the black only once over the past nine quarters -- in the June quarter of 2002, when Sun eked out a one penny profit. In the third and fourth fiscal quarters of 2003, net income of $12 million and $4 million proved too dinky to translate to positive EPS, which remained stuck at the breakeven point.

Sales, too, have been dismal. In fiscal-year 2003 ending in June, revenues from hardware -- which accounts for about three fourths of total sales -- dipped 14%. The company reported a massive $2.4 billion loss, though $2.1 billion of that reflects a write-down for impaired goodwill.

Sun's management is confident it's on track for a turnaround, but Wall Street has heard similar promises before.

Steve Milunovich of Merrill Lynch says Sun's new initiatives are "interesting long term but unlikely to impact the company's growth rate until fiscal year 2005 to 2006 at the earliest." Sun hasn't made a good case for why its products are any different or better than those of IBM or H-P, he says. (His firm has done banking for the company.)

One fund manager who sold off his Sun holdings a few years ago says he remains skeptical. "How excited can you get about a company with declining sales?" he says.

"It seems to me [CEO Scott] McNealy just didn't have a mature, realistic appreciation of the fundamental nature of some of the challenges he was facing, and this relates to why I follow Sun with only half an eye," the fund manager says. "I don't see much of that realism yet."

Even Sun's current investors are far from bullish. Lured by Sun's bargain price, John Rutledge, manager of the (ETCAX)Evergreen Technology fund, opened what he calls a "tiny" position in Sun in May. "The stock price is cheap, they have plenty of cash and they're not losing money. Therefore, they're not going to zero," he sums up.

When that's the best an investor can muster, a company had better do a lot more than talk about success. It has a lot of proving to do. But if McNealy succeeds, he might be asking the Street, who's crazy now?

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