Earnings Preview: Sun Microsystems

| About: Sun Microsystems (JAVA)

Sun Microsystems (JAVA) is expected to report Q2 earnings Tuesday, January 27, with a conference call scheduled for 4:30 pm ET.


The consensus estimate is a loss of (8c) for EPS and $3.17B for revenue, according to First Call.

Analyst Views

Goldman expects Sun’s Q2 revenue to come in below consensus and closer to its estimate of $3.11B, down 14% YoY, due to a more tempered budget flush. Goldman said the adverse impact of lower volume will likely be compounded by weaker mix and pricing, keeping gross margin in the low 40% level for a second quarter in a row, compared with its historical range of mid-to-high 40%. Goldman's forecast is 42%, down more than 6% YoY. Goldman also expects EPS to come in below consensus by a penny with an estimate of a loss of (9c).

The firm's checks suggest further softness in Sun’s high-end servers, as worsening demand is exacerbated by a secular decline in UNIX servers. On the other hand, Goldman expects relative strength in Sun’s mid-range and entry level servers. Going forward, Goldman expects consensus estimates to be cut due to deteriorating demand on top of a below normal seasonality. Goldman is estimating $2.75B on a loss (23c) in EPS, below consensus of $2.88B and a loss (21c). Bottom-line, Goldman expects to see further downside to Sun shares as challenges in several of Sun’s key customer verticals, the decline of its core UNIX server market (50%+ of its revenue), as well as its bloated cost structure should continue to weigh on Sun’s profitability and the shares in the intermediate term.