Sun Still Yelling, Carrying Big Stick After Revenue Miss

Earnings Scorecard
Actual	Estimated*	Year-Ago
$0.16	$0.16	$0.11

Updated from 4:30 p.m. ET

It's official. Not even the great Sun Microsystems (SUNW) is immune to the IT spending slowdown.

The Unix-systems giant posted fiscal second-quarter earnings in line with Wall Street's expectations Thursday after the close. For the period ended Dec. 31, Sun said that it earned $552 million, or 16 cents a share, matching the figure expected by analysts polled by First Call/Thomson Financial.

But the company was light on revenue. Sales totaled $5.12 billion, representing an increase of 44% from the year-ago period but falling short of the figure to which Sun had guided analysts. In November, CFO Michael Lehman told analysts that Sun expected its percentage sales growth for the quarter to be in the high 40s. Accordingly, analysts were looking for revenue to come in about $130 million higher than it did.

Sun also lowered its guidance for 2001 sales growth. On the conference call following Sun's earnings release, Lehman said that the company now expects sales to grow in a range between 30% and 35%. In mid-October, when Sun reported its fiscal first-quarter results, Lehman told analysts that the company's percentage sales growth for 2001 would likely come in "somewhere in the mid-30s"

In the most recent quarter, Sun managed to get its revenue as high as it did partly by drawing on its existing order backlog, rather than from new orders. Sun's order backlog now stands at $1.64 billion, down from the prior quarter's $1.8 billion. Gross profit margins, meanwhile, fell for the second straight quarter, this time to 47.8%. In the previous quarter, Sun's margins had declined to 48.2% from 52.1%.

To be fair, the bar was set fairly high for Sun. An explosion of demand for Unix servers -- not to mention the company's uncanny ability to grow its share of that hot market against a thickening field of competitors -- has helped Sun put together a string of nearly flawless quarterly reports that are now making for very tough comparisons. The company had posted accelerating year-over-year sales growth of 22.8%, 25.4%, 35.5%, 41.8% and 60.4% during its last five quarters.

That performance helped turned Sun into one of Wall Street's most favored issues. Having already gained a face-melting 250% in 1999, the stock gained another 66% in the first nine months of 2000. But when technology stocks began their broad decline last fall, amid a demand slowdown affecting everyone from Apple Computer (AAPL) to Xilinx (XLNX), Sun fell, too, losing more than half of its value in the last three months of 2000. News that the company was offering 3% rebates to Sun vendors in late December contributed to the sense that the Unix server business could be weakening along with other tech markets.

All the while, Sun never conceded that things were softening. But it's conceding now. "We experienced an unexpected downward change in the level of projected demand in the month of December," Lehman said. "We experienced that change rather suddenly and without much warning."

The conference call was classic Sun, featuring the usual amount of yelling by CEO Scott McNealy and President Ed Zander. One by one, the analysts from the large brokerage firms got on the line and meekly made their requests: requests for more detailed information on things like gross margins, earnings-per-share guidance, shipping volumes for Sun's new Ultrasparc III servers. Zander and McNealy answered nearly every question with the brashness that masochistic securities analysts have come to love.

"The company hasn't changed," said McNealy. "We've got the same strategy, the same market position, the same products, the same people -- the same momentum, passion and energy." You'd never know the same company just missed revenue estimates and lowered forward guidance.

But the yelling works. After surging $2.50, or 7.7%, to $34.88, Sun was pretty much holding its ground in after-hours trading, lately sitting at $34.40.

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