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Make or Break Time for Sun

These are turning into tough days in the executive suite at Sun Microsystems. Wall Street has begun to get impatient with the company, causing the rumor mill to do what it does so well: grind.

Take your pick of the latest gossip: the company is for sale; its storage business is for sale; the SPARC processor will be killed off; CEO Jonathan Schwartz's head is on the chopping block. The TechCrunch IT blog reports that Salesforce.com, which once proudly boasted of being run on Sun hardware, has retired its last Sun servers in favor of Dell hardware. Salesforce.com declined to comment on the report.

The company isn't keen on the rumors and made no bones about saying so.

"Sun is committed to its growth strategy, its leadership team and building value for its shareholders," the company said to InternetNews.com in an e-mailed statement. "Storage is an important part of that strategy as evidenced by our Open Storage initiative, our leadership in flash, and our announcement of the world's first 1TB tape drive. Statements to the contrary are pure rumor mongering and FUD ."

To try and halt its bleeding, Sun (NASDAQ: JAVA) earlier this week announced that the fourth quarter would come in at projections when it reports on Aug. 1. It said the quarter's net income would be between 5 cents and 15 cents a share and full-year earnings would be between 25 cents a share to 35 cents a share. Revenue for the fourth quarter would be between $3.72 and $4 billion.

That gave the stock a temporary boost, until a bunch of Wall Street analysts said they thought otherwise. They contended that Sun didn't include restructuring charges in its numbers, which will cause it to miss estimates. Barron's collated the negative comments into one collective beatdown.

Unreasonable expectations?

But industry observers InternetNews.com talked to think Wall Street is being unfair, given the mess Schwartz inherited in 2006. "If you look at what he was handed when he took over, I have a hard time pinning the current position of the firm on him," said Steven O'Grady of Redmonk.

"He didn't have a lot to work with when he took the reigns," O'Grady said. "Is he perfect? No, but too often executives are assigned blame for expectations that can't be met, or folks are looking for an immediate turnaround."

Josh Farina, an analyst with Technology Business Research, added, "I can't see how Schwartz can't be in trouble, but as for the company itself, he's done a good job getting them back on a growth path and has gotten profitability back."

In the two years since Schwartz took the helm from co-founder Scott McNealy, he has been nothing if not bold. He made peace with Intel and now offers Intel-powered Sun hardware. He also secured a truce with Dell and Microsoft, something not possible under his predecessor.

More shocking, Sun has made the Java language and Solaris operating system open source under a generous license, the GPL. This has won Sun a lot of new friends in the open source community.

Then Schwartz made a surprising play by acquiring open source database darling MySQL for $1 billion, a mighty generous multiple for a company with $50 million in sales.

While Sun has returned to profitability, revenue is barely moving. While IBM, HP and Dell rack up large wins, Sun crawls along with minimal year-over-year growth, and no company can afford to fall behind.

"Clearly they are not blowing people's doors off," O'Grady said. "The strategy has not been an unqualified success, but the expectations that it would be are misguided. The bets made around open source software are not bets that pay off in six quarters. They take a few years."

David Hill, principal of the Mesabi Group, concurred that patience is needed. "He inherited a real mess. It takes time to solve a problem. The mistake many people make is they react abruptly and try to make too many changes quickly," he said.

Hill added that former General Electric chairman Jack Welch needed a ten-year plan to change the culture at GE and make it the success it became.

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