Blaming Europe, Sun Pares Down Fourth-Quarter Expectations

Updated from 4:20 p.m. ET

Sun Microsystems' (SUNW) mid-quarter update once again lived up to its spectacular hype, giving the company yet another opportunity to trim its sales and earnings targets.

The Unix systems giant said that it now expects fiscal fourth-quarter revenue to come in between $3.8 billion and $4 billion, as much as $600 million below the level anticipated by analysts polled by Thomson Financial/First Call. Earnings, the company said, will be in a range of 2 cents to 4 cents a share. The consensus estimate of analysts was 6 cents a share. The fourth quarter ends next month.

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Sun had lowered guidance for its third quarter on its last mid-quarter update call, hosted back in February. And investors spent the long holiday weekend fretting over the possibility that Sun would warn again this time, prompted by the company's decision Friday to reschedule its conference call to after the close Tuesday from during the trading day.

The news might come as somewhat surprising to investors who have concluded that things just couldn't get any worse. Perhaps giving some solace, Sun CFO Mike Lehman said it appeared that the U.S. market had stabilized in the past three months. But Europe was an entirely different story. "Demand in Europe has tailed off more than we thought about six or seven weeks ago," Lehman said. "That's the news in this whole conference call."

Of course, it would be naive to presume Sun's problems are limited entirely to the economy. Huge competitor IBM (IBM) has become much more focused on Unix, and the business driven by onetime big-spending telecom customers is drying up. In the longer term, meanwhile, commodity boxes that run improving Intel (INTC) chips and Windows operating systems threaten to eat into Sun's share of the server market.

But Lehman was dismissive of Intel's new Itanium chip, which will be used in Windows servers trying to compete against some of Sun's UltraSparc powered products. "There's nothing in that announcement that people haven't been talking about for months, if not years," he said. "That's not a big issue. I don't hear that when I talk to the field at all."

Surely it can't get worse than this, right?

Place your bets. Lehman refused to address the future beyond this quarter, telling analysts that Sun's management would provide that guidance when it reported its full fourth-quarter results.

But the information the company did give Tuesday wasn't encouraging about the prospect of a near-term recovery. Lehman said that he expected Sun's order backlog to fall by $250 million in the fourth quarter. That's a decline of 19%, on top of a 29% decrease in backlog in the prior quarter, said A.G. Edwards analyst Shebly Seyrafi. Meanwhile, bookings (a term that refers to sales plus backlog change) look to be flattish in the fourth quarter, even after falling 27% in the third quarter, according to Seyrafi. (A.G. Edwards hasn't done recent underwriting for Sun.)

"I get the feeling that they're throwing a lot of things into this quarter to make it look good," Seyrafi said.

Sun investors hope that's not the case. Big backlog reductions and no bookings growth like that beg the question of how Sun will be able to accelerate its sales beyond the fourth quarter. The problem is that the fourth quarter is normally Sun's strongest by far, with sales in that period having grown by 20% in 1999 and 25% in 2000. So you can expect analysts to lower their forecasts for Sun's first quarter of fiscal 2002 Wednesday morning. The consensus revenue estimate currently stands at around $4.8 billion, or 26% higher than the low end of the new range Sun gave for its fourth quarter.

After driving the stock down $1.80, or 8.8%, to $18.67 during the day, investors pushed it even lower in after-hours trading. It recently changed hands on Island at $17.55 a share.

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