Sun earnings report casts a cheerless light

Citing the difficult economy and a tremendous hit on their intangible value, Sun's earnings outlook is so uncertain the company declined even to give guidance for their upcoming quarter during their 1Q earnings call on Thursday.

The company's announced loss in the July-to-September period exceeded even the prediction the company made last week; adjusted for charges, the loss is somewhere between 2 and 12 cents per share. (Analysts had predicted one cent per share.) The company posted a $1.677 billion loss for the quarter.

The economy was a bruising factor too. Year-over-year revenues are down in North America (12%), Europe (8%), and the more developed Asian-Pacific markets (4%), growing only in the conglomeration of nations Sun calls "emerging markets" (up 12%). CFO Mike Lehman said that trouble in the financial sector, which buys a lot of the company's higher-end gear, had a pronounced effect on sales, especially in the North American and European markets. Overall, sales fell to $2.99 billion, or 7.1 percent year-over-year.

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But don't give up on Sun yet, argued Schwartz and Lehman -- there's cash on hand ($3.3 billion); there's good growth in Solaris SPARC Chip Multi-Threading systems, in non-tape-based storage, and all through the software sector; and IP holdings are good and getting better as the open-source model continues to gain acceptance.

Sunrise, sunset, as the song goes, and some of Sun's gloom can be ascribed to products on their way out and products on their way in. The company took a one-time hit on "last-time buys" of components for their Ultra SPARC 4 line as they prepare to phase it out; on the horizon, the new "Rock" processor has experienced delays.

The company's staking a lot on the continued growth of open source and the de-emphasis of proprietary vendor systems. MySQL is drawing plenty of interest, says the company, as customers look to manage database costs; not only is that good news for MySQL numbers, it's a nose in the tent for getting businesses to switch to open-source products.

Schwartz says that "we believe Sun is well positioned to weather the downturn and ultimately become the biggest beneficiary in the open source revolution in both systems and software."

One of the significant factors dragging down today's numbers was a one-off charge related to the company's perceived difficulties and the effect they've had on the firm's intangible assets -- intellectual property, brand recognition, and so forth. In 1Q the company took a look at the economy, Sun's operating results, and the ongoing decline in Sun's market capitalization, and felt constrained to do a goodwill impairment analysis. That analysis of the hit to the company's intangible assets isn't complete yet, but they've penciled in a $1.445 billion impairment charge in the meantime. The systems unit will take the brunt of the writedown.

Sun stock prices today hovered near the bottom of the company's 52-week range, listing at $5.29 in after-hours trading. The last time the stock spent a sustained amount of time at the 5 level was late 1994.

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