Shady Outlook for Sun?

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In a clear sign that the light at the end of the tunnel for the tech industry may still be in the distance, Sun Microsystems yesterday warned that sales for its first quarter will fall short of expectations.

In a conference call with analysts, Sun's Chief Financial Officer Steve McGowan said its revenues for the fiscal first quarter, ending September 30th, are likely to tap out at around the same level as Q1 2002, when sales hit $2.86 billion. The company had already projected a small loss for the first quarter, and the CFO said he expects the company's gross profit margin to be about 41%, or flat with the fourth period.

"We've not seen any improvement in the current IT spending environment. In fact, some would say it might actually be worsening," McGowan said.

Despite speculation about further layoffs for the company, McGowan said the company did not plan on any changes beyond a previously announced headcount reduction of 1,000 people by December, with additional implementation of both flexible office sharing and work from home programs to reduce infrastructure costs.

The CFO emphasized the importance of market share gains in tight times, highlighting a recent Gartner survey that showed the company gaining ground in the UNIX market.

Brad Day, an analyst for Giga information group, notes that while Sun has had strong sustained growth in the volume systems products segment of their business, when you get into mid-range and high-end servers it has been a sluggish recovery. Day attributes the success in the entry-level range to aggressive pricing to compete with the Intel-sever competition, and notes applying similar principles to new technologies in the higher-end products may be the key to long-term financial health for Sun.

"As you start to move through the next several quarters, I think you are going to see some of the same volume system pricing concepts that you saw in the entry and mid-range product line, moving more to their mid-range and high-end systems as they apply the same pricing economics to those platforms," said Day.

Despite the somewhat gloomy outlook, Steve McGowan tried to reassure investors, closing the call by reminding the analysts that Sun still generated positive cash flow from operations this quarter.

While the news was somewhat bleak, it did not come as too much of a shock for the investment community. Deutche Bank Securities held its "strong buy" rating, noting that despite heightened competition possibly eroding opportunities for Sun, its large customer base, strong product flow and commitment to R&D should allow the company to exploit an IT spending upturn when it occurs.

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