Sun Weathers Rainy Days

The sluggish economy’s toll on Sun Microsystems (SUNW) was illustrated on
Friday when the company slashed its third-quarter sales forecast by nearly
one-third.

“We are disappointed with one and only one thing, and that is the U.S.
economy,” said Michael Lehman, CFO. “I think there is a broad-based downturn
in capital spending.”

The network computing giant sliced its sales forecasts by 10 to 13
percent for the quarter — a 30 percent drop from original growth
expectations. “We now project Sun will earn only 7 to 9 cents per share,”
said Ed Zander, COO. Expectations had originally been set at 15 cents per
share.

The problem, in a nutshell, is that many of Sun’s corporate clients are
no longer investing in computer equipment, according to Zander. Major firms
are slowing technology infrastructure build outs, reacting to a combination
of the weak economy and the demise of dot-com startups, which had heightened
competitive pressure on the older companies to spend on technology.

“Anything to do with capital spending is being slowed down,” added
Michael Lehman, CFO.

Business is very weak, confirmed analysts at Goldman Sachs (GS). In a
published report, GS noted, “The singular factor affecting Sun is
macroeconomic. This has resulted in customers either cutting back or pushing
out spending, leading to an abrupt and precipitous slowdown.”

However, the report predicts that Sun’s downturn is temporary, noting
“Economic factors have the upper hand right now, but we expect that Sun’s
new product cycle to gradually begin to have an impact, driving
progressively higher growth even in the face of a negative economic picture
with much room for positive revenue and earnings leverage should the economy
cooperate.

“Even in the face of dramatic disruptive changes, Sun seems to be in good
control over its operations and the company has the flexibility to make
quick changes. With the sharp slowdown in telco, Sun is in the process of
refocusing efforts in other industries such as retail and software.”

The report dually noted that Sun’s international businesses, including
iPlanet, are faring well.

In the meantime, Lehmann said the company will cut back on its hiring and
administrative expenses to raise profits as well as continue to invest
heavily in research and development.

Further, the company’s board of directors has authorized a stock
repurchase program in which Sun intends to acquire up to $1.5 billion of its
outstanding common stock. As of January 31, the company had about 3.26
billion shares of common outstanding stock.

At press time, Sun stock was down by 30 percent, trading at $20.750. The
company’s 52-week high is $64.656, the 52-week low is $19.188.

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