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Sun Shares Dip After Goldman Sachs Report

A Goldman Sachs report that lowered estimates for Sun Microsystems Inc. "broadly" caused shares of the giant hardware vendor to dip 30 cents Tuesday to about $14.20.

The report, issued one day before Sun plans to air an intra-quarter update conference call, found that Sun was losing the battle in the current stale economic climate.

GS' Laura Conigliaro said she expects Q1 (Sept.) revenues to hit $3.7 billion, as opposed to the previous estimate of $3.8 billion. She also cut earnings per share (EPS) in half from 2 cents per share to 1. While Sun's stock has shed 50 percent of its weight in the past year, Conigliaro said the company's stock remains a silver lining in a cloud full of competitors, as well as one "where risk/reward still looks generally positive over an intermediate term."

Reasons for Conigliaro's thoughts about Sun's progress are many. For one, tightening in the U.S. and Europe has not abated. That is to say, Sun may not have hit bottom in the worldwide market; an industry-wide freeze in capital spending has not helped either.

But where GS and Conigliaro really see interesting battles playing out, is between Sun and archrival IBM. Though the investment firm acknowledged that rivals play second fiddle to the macroeconomic environment (whom all firms must answer to) in terms of forces that are detrimental to business, customers are playing one vendor against another. For example, a savvy titan such as AOL or Microsoft Corp. may choose equipment from Sun or IBM based on who was offering the best deal at the time. While this is standard business practice, a hardware vendor feels the competitive noose draw tighter when the economy has lagged. Price slashing may ensue, etc.

Conigliaro addressed this as such: "When it comes to strategic accounts or high profile orders, however, both IBM and Sun are willing to fight aggressively although we believe that Sun is still drawing the line at unprofitable situations. As an example, Sun and IBM are currently competing over a multi-million dollar deal, in which IBM has agreed to pay for porting the applications to its platform and doing the installation for free. While Sun offered to match what IBM is offering, our understanding is that the deal is still in the process of being decided. Our conclusion: sales cycles are lasting longer as customers use the dynamic of IBM versus Sun to their advantage."

The chief pawns in Sun's chess match with Big Blue comes in the form of the firms pending high-end servers -- Sun's StarCat and IBM's Regatta. Conigliaro said both should arrive at the end of this calendar year, with Sun touting its total platform, including the Solaris operating system, instead of concentrating on raw power.

Another bright spot, according to Conigliaro, may be Sun's storage relationship with Hitachi. She said it may be too early for the deal to pay dividends this year, but that its contribution to Sun's storage may occur sooner than expected.

"We continue to see this relationship as a positive profit contributor to Sun, with the ultimate benefit going well beyond storage systems and extending into Sun being able to sell more storage software and services," Conigliaro said. "To ramp this business sooner, Sun may need to add to its hiring in storage, where it currently has 400 storage specialists.

Hiring? This may involve some tricky maneuvering later as Conigliaro also said she sees layoffs as a possibility for Sun. Her evidence? She said revenue per employee figures have dropped over the past year and have not been this low since 1998.

Sun isn't the only firm that needs to be careful. Ultimately, GS feels the current macroeconomic cycle will win out over most companies' product cycles -- and not just in hardware. GS also urged caution on major software plays Oracle Corp. and Siebel Systems Inc. not long ago.