Shady Outlook for Sun?

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In a clear sign that the light at the end of the tunnel for the tech
industry may still be in the distance, Sun Microsystems
yesterday warned that sales for its first quarter will fall short of
expectations.

In a conference call with analysts, Sun’s Chief Financial Officer Steve
McGowan said its revenues for the fiscal first quarter, ending September
30th, are likely to tap out at around the same level as Q1 2002, when sales
hit $2.86 billion. The company had already projected a small loss for the
first quarter, and the CFO said he expects the company’s gross profit margin
to be about 41%, or flat with the fourth period.

“We’ve not seen any improvement in the current IT spending environment. In
fact, some would say it might actually be worsening,” McGowan said.

Despite speculation about further layoffs for the company, McGowan said the
company did not plan on any changes beyond a previously announced headcount
reduction of 1,000 people by December, with additional implementation of
both flexible office sharing and work from home programs to reduce
infrastructure costs.

The CFO emphasized the importance of market share gains in tight times,
highlighting a recent Gartner survey that showed the company gaining ground
in the UNIX market.

Brad Day, an analyst for Giga information group, notes that while Sun has
had strong sustained growth in the volume systems products segment of their
business, when you get into mid-range and high-end servers it has been a
sluggish recovery. Day attributes the success in the entry-level range to
aggressive pricing to compete with the Intel-sever competition, and notes
applying similar principles to new technologies in the higher-end products
may be the key to long-term financial health for Sun.

“As you start to move through the next several quarters, I think you are
going to see some of the same volume system pricing concepts that you saw in
the entry and mid-range product line, moving more to their mid-range and
high-end systems as they apply the same pricing economics to those
platforms,” said Day.

Despite the somewhat gloomy outlook, Steve McGowan tried to reassure
investors, closing the call by reminding the analysts that Sun still
generated positive cash flow from operations this quarter.

While the news was somewhat bleak, it did not come as too much of a shock
for the investment community. Deutche Bank Securities held its “strong buy”
rating, noting that despite heightened competition possibly eroding
opportunities for Sun, its large customer base, strong product flow and
commitment to R&D should allow the company to exploit an IT spending upturn
when it occurs.