Sun Microsystems Inc faces a shrinking customer base, competitors who are gaining market share and a shift in the computer industry toward lower-cost servers that threaten future profit, investors said.
You'd never know, listening to Chief Executive Scott McNealy.
"The nice thing about being No. 1 is that tough times only make No. 1 even stronger," McNealy said in an interview last week.
Until this year, McNealy has been able to make good on his boasts, investors and analysts said. Sun's sales rose an average 19 percent a year in the past decade. Now, some said McNealy needs to chart a new course, as reduced corporate spending, renewed competition from International Business Machines Corp and the disappearance of many dotcom customers threaten growth.
Formidable competitors
McNealy has "financially powerful competitors with good brand names," said Louis Kokernak, senior equity strategist at Martin Capital Advisors, a Sun shareholder who manages US$55 million. "He's got to continue to differentiate Sun Microsystems from well-entrenched competitors at the high end and from approaching competition from below."
The company, whose servers run large corporate networks and Internet sites, on Friday reported its biggest quarterly loss ever, US$0.13 a share in the second quarter ended Dec. 30. The loss was US$431 million on sales that fell 39 percent to US$3.11 billion.
Palo Alto, California-based Sun had net income of US$0.12 a share on sales of US$5.12 billion a year earlier.
Excluding job cut expenses and investment losses, Sun said it would have had a loss of US$99 million, or US$0.03 a share. On that basis, which doesn't comply with generally accepted accounting principles, the average estimate of analysts surveyed by Thomson Financial/First Call was for a loss of US$0.04.
Last year's slump in technology spending came just as IBM, the largest computer maker, emerged with new servers to compete with Sun's in the high end of the market.
At the same time, PC makers' servers running on Intel Corp chips and Microsoft Corp software were becoming more powerful and reliable for running networks and dishing up Web pages. These machines, which analysts said cost as much as 40 percent less than Sun's, pose a new challenge in the market for cheaper server computers.
In the quarter ended Sept. 30, Sun's share of the market for servers that run on the Unix operating system fell to 33 percent, from 36 percent in the previous quarter and 39 percent a year earlier, according to market researcher Gartner Inc.
IBM's share, meantime, climbed to 21 percent from 20 percent in the previous period and 17 percent a year earlier.
Investors haven't lost faith in McNealy, 47, who earned US$100,000 in fiscal 2001 and received stock options worth an estimated US$44.4 million in 10 years. He also was paid US$2.23 million under an incentive plan started in 1990.
McNealy has steered Sun through a recession that has buffeted the entire computer, software and services industry, shareholders said. Under his watch, Sun's cash hoard grew to US$1.86 billion, and the company in 2001 spent US$2.02 billion, or 11 percent of sales, on research and development to spur future business. Sun shares, which have dropped 62 percent in the past year, rose 49 percent during the quarter.
The shares fell US$0.25 to US$12.12 Friday on trading of 77.6 million shares, making them the third most active on US exchanges.
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