Sun Microsystems: Can it grow?
Sun Microsystems has made a lot of progress in recent quarters: It has become more efficient, stabilized spending, transitioned to new products and made smart acquisitions like MySQL in a quest to offer a complete software stack. But there is one lingering question: Can the company grow?
That question hangs in the air for a while and it will until Sun delivers revenue growth--something that has been missing. On Thursday, Sun reported fiscal second quarter revenue of $3.61 billion with earnings of $260 million, or 31 cents a share. The results were in line with the outlook Sun gave a week ago when it announced plans to buy MySQL. The issue: Revenue was up 1.4 percent in the December quarter compared to a year ago.
On Sun's conference call, officials were optimistic. CEO Jonathan Schwartz cited double digit growth rates in emerging markets, alternative products like Project BlackBox, OpenSolaris adoption and Linux/Intel based servers. Sun is also benefiting from a weak dollar.
"I want to be clear that growth absolutely remains our number one priority. Based on our strong product lineup, as well as the news of our intent to acquire MySQL, among the fastest growing players in the $15 billion database market, I couldn't be more positive about our prospects and momentum," said Schwartz.
Nevertheless, Sun's growth--including a weak dollar--isn't that hot. Growth for fiscal 2008 is projected to be in the mid-single digit range. That means the March and June quarters, which are seasonally slow, have to deliver revenue growth of more than 5 percent.
Why does growth matter? For investors, the answer is obvious--shareholders always want growth. But growth goes beyond Wall Street. Customers--or potential customers--want to partner with a company that has momentum. Growth feeds on itself. If CIOs hop on the Sun bandwagon en masse others will follow.
This psychological impact can't be measured per se, but negative headlines matter. For instance, a server buyer has the choice between Dell or HP. HP could have an advantage solely because it has had flawless execution over the last year and change. Dell has wrestled with customer service issues and cooking up better PC designs. These choices--that occur every day--operate in the background. If Sun doesn't grow folks say: "Well, no one else is rushing to buy Sun gear why should I?" That's why Schwartz is trying to grow the company.
Wall Street analysts duly note the growth issue. Louis Miscioscia, an analyst at Cowen & Co., kept a neutral rating "given a lack of top-line growth and the possible impact from a macro economy slowdown." Miscioscia adds that a $120 million channel inventory flush boosted growth in the U.S. and Sun's international growth isn't on par with IBM and HP.
Other analysts echoed those comments and noted that Sun should focus on cutting more costs amid a potential weak technology spending environment. But in the end, Sun's bandwagon won't fill up until it delivers more growth.