Sun Microsystems, Still Setting in the West (JAVA)

Sun Microsystems Inc. (NASDAQ: JAVA) just cannot seem to get things right and that is more than evident in its shares this morning.  Last night, the company warned of lower than expected earnings.  Unfortunately, that may just be the start of its issues, and there are very few clear answers.

The company forecasted revenue of  $2.95 billion to $3.05billion.  While it sees a GAAP loss of -$0.25 to -$0.35 EPS, itsnon-GAAP numbers are also expected to show a loss of -$0.02 to -$0.12EPS.  Revenue expectations are $3.14 billion and non-GAAP earnings arenow -$0.01 EPS, but these have just recently come down to this level.

Its gross margin is expected in a range of 39% to 41%.   The GAAP lossis from restructuring items and it is taking write-downs on carryingvalue as goodwill.

Where the real problem is going to come is likely in the nextquarter.  Sun talked about customer slowdowns and if you interpolatethe forecasts being given elsewhere with slowdowns, then it becomesalmost impossible to believe that this next quarter’s estimates of $0.17non-GAAP EPS and $3.54 billion in revenues is feasible.

One of the other large issues the company faces is that many investorsjust do not really understand the company any longer.  High-end serversare now very competitive and most Java applications are essentiallyfree to license.  It made acquisitions to generate higher earnings, butit seemed very short-lived.  It also seems to us on the surface thatthe big move was on backward looking legacy products rather than onforward looking large transformative deals, but that may just stem fromyears of disappointment here.

Shares are down 13% at $4.99 today and the 52-week trading range is$4.68 to $24.08.  If this keeps up, the company will get to announce areverse split and stock ticker change all over again.

Formal earnings are next Thursday.  No one is very excited.

Jon C. Ogg
October 21, 2008