January 14, 2005

Sun Microsystems: Long-term concerns, shorter-term positives

Author: Melanie Hollands

Shorter-term, there are some positives for Sun Microsystems; but long-term Sun still has many strategic and tactical challenges. For the last three years, Sun has delivered annual earnings losses with only two quarters in the black -- barely. Although Sun's two previous quarters delivered a modest profit and the worst could be over, that doesn't mean Sun's fundamentals are sustainably robust. Far from it.

Last night, Sun reported earnings. (Quarterly earnings are a good read on the progress of turnaround situations, such as Sun's.) Revenue growth was soft -- down 2 percent year-over-year. This isn't surprising and was consistent with this column's opinions: on Sept. 17, this column said that in spite of enthusiasm in the media and investment communities for Sun's growth prospects that its outlook would remain muted. Sun's revenues should have been stronger, since the weaker U.S. currency should have helped. So this indicates that Sun's underlying business growth rate was quite weak and that the company has lost share.

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