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Sun Microsystems'


stock was taking it on the chin Friday, as the company reverted to its habitual underperformance and investors reacted with familiar ferocity.

The struggling computer maker reported its lowest gross margin in nearly two years, projected a return of the red ink in the current quarter, and conceded that it does not expect any growth in the U.S. -- the region that accounts for 38% of its sales -- for at least the next two quarters.

And yet, true to form, Sun's management is adamant that the company is better positioned to prosper than ever, once a few economic gray clouds pass.

"If anything we feel very good about the breadth of the product line we're sitting on," CEO Jonathan Scwhartz told analysts in a conference call Friday. "The feedback we're getting from customers is fantastic."

The feedback from Wall Street was decidedly less cheery however. Shares of Sun fell 12.3%, or $1.31, at $9.32 in midday trading Friday.

The Santa Clara, Calif., company's shares are down 63% from their 52-week high of $25.04 and are trading at the lowest level in years.

Pacific Crest Securities analyst Brent Bracelin says Sun has become "a bit of a broken record."

"This is a company

in which every year we sit here in July and hear the same story: the goal is to grow revenue and expand margins," says Bracelin, who has a neutral rating on Sun shares.

But while Sun has had a couple of short, multi-quarter spurts of improvement over the last five years, the overall track record remains underwhelming.

In the three months ended June 30, Sun had sales of $3.78 billion, down 1.4% year-over-year and in line with analysts estimates, following Sun's preannouncement earlier this month.

Sun net income declined 73% to $88 million, or 11 cents a share, vs. $329 million, or 36 cents a share at this time last year.

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The company said that billings of servers based on its Niagara processor were up 60% year-over-year, with the product bringing in $1.1 billion in revenue in the fiscal 2008 year.

But sales of Sun servers based on


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processors were up a scant 1% year over year in the fourth quarter. And Sun said sales of its Unix servers based on the Sparc-processor slowed in the quarter.

Moreover, sales of low-end products represented a greater portion of Sun's business in the quarter, pinching its profit margins. Sun's 44.3% gross margin was down 60 basis points sequentially and down form 47.2% at this time last year.

And the company backed even further off its 10% operating margin goal. Sun had initially promised to attain 10% operating margins in fiscal 2009 year, but told investors in May that 7% was a more realistic target given the economic conditions.

On Tuesday, Sun lowered the bar yet again, projecting 5% to 7% operating margins in fiscal 2009.

After a change in leadership in 2006, that saw co-founder Scott McNealy replaced as CEO by Jonathan Schwartz, the company appeared to be in the midst of a long-awaited turnaround. Schwartz and finance chief Mike Lehman delivered several successive quarters of profitability, while cutting costs and introducing new products.

But the shine wore off in May, when Sun reverted to a loss. Friday's earnings report offered little reason to hope things would get better again any time soon.

Sun said that revenue growth in fiscal 2009 will be in the low single digits, and that sales will decline in the current quarter. The company expects to post a net loss in the current quarter.