Sun's Financial Failings Greatly Exaggerated
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Much has been made of the precarious position of Sun Microsystems (NASDAQ: JAVA) of late, but the company has much more time than its critics would have you believe (see Should EMC Buy Sun? and What Will Become of Sun Microsystems? ).
Much of the coverage has focused on Sun's $1.7 billion quarterly "loss" and plans to cut 15 percent to 18 percent of its workforce as evidence that the company is in peril. One Associated Press story, for example, said the economic downturn was pushing Sun "to the brink of extinction."
The truth is that Sun has much more time than the urgent tone of much of the coverage would have you believe, and has no need for a white knight or a federal bailout. The company's dramatic September-quarter loss was largely a non-cash write-down the company's actual cash levels dropped $242 million in the quarter. Not pretty, but with about $2 billion more in cash and liquid investments than debt, the company could survive for a couple of years at its current cash burn rate. There are blue chip companies that would kill to be in that position right now.
With the $700 million to $800 million in projected annual savings from a smaller workforce, Sun could get back to break-even in less than a year. Sun's actual cash losses over the last four reported quarters which include three quarters of recession were just over $700 million. Even if the company loses another $500 million or more before those savings kick in, it will still likely have a strong balance sheet when it returns to profitability.
That won't make Sun a vibrant growth company or return it to star status on Wall Street indeed, the company faces challenges that go well beyond cash flow statements and balance sheets, and there the company could use all the suggestions it can get but don't expect Sun to disappear over the horizon anytime soon.
But don't take my word for it. After Sun's October earnings report, Bernstein analyst Toni Sacconaghi who was putting out first-rate research back when other analysts were pumping profitless dot-coms wrote that "Sun appears ready to take further cost action, but the key question is whether the company has the intestinal fortitude to ensure its cuts are large enough, which has not been the case historically. We believe a workforce reduction of nearly 15 percent is necessary."
Two weeks later and just hours before Sun announced its layoff plans Sacconaghi again called for job cuts of as much as 20 percent, based on the assumption of no revenue growth. He said Sun could also sell assets such as MySQL and Java, monetize mature businesses such as high-end SPARC servers and legacy storage products, and invest in growing businesses like open storage and CMT (Niagara) servers.
Sacconaghi said that for longer-term investors with a multi-year time horizon, "Sun is attractively valued at current levels ... based on our belief that there is ample room to boost operating margins through an aggressive focus on costs and profitability (akin to what HP has done over the last three years)."
It still has a long way to go, but Sun may finally be on the road to doing just that.
Paul Shread is managing editor of Enterprise Storage Forum and covers technology stocks for InternetNews.com.