2HRS2GO: Sun looks bright, but future glimpses needed

Sun Microsystems Inc. (Nasdsaq: SUNW) gets a lot of publicity as a standard bearer for hot technology, but when you look beyond the Java propaganda, you're looking at a something built on a Business 101 rock.

The secret of Sun's success is no secret at all: solid products, aggressive sales and decent cost controls. Over the last seven quarters, gross margins consistently have run slightly above 50 percent, SG&A expenses remain in the high 20s on a percentage basis, and the cash position climbs steadily. Revenue over the last seven quarters has averaged growth in the mid-teens, although the fiscal third quarter saw a 24 percent jump as some companies accelerated purchases to get their systems in place ahead of the century turn.

Have an opinion on this?

Unfortunately, that same phenomenon led Sun to caution investors to expect an unusually slow second half; "Heartbreak Hill" is how CEO Scott McNealy described it.

You'll soon find out how rough the terrain looks, because Sun is scheduled to report fiscal fourth quarter results tomorrow after market close. First Call's survey of 19 analysts predicts earnings of 46 cents a share, which would represent relatively healthy growth of 24 percent.

That consensus actually was raised recently, but it's not clear why, since the overall server market seems to be running about where you'd expect. International Data Corp.'s latest market survey indicates Sun continued taking market share from Unix rivals such as IBM, Hewlett-Packard and Compaq, but even Sun itself has told investors to expect an overall slowdown in demand.

"That can't be ignored," says Jonathan Ross, analyst with ABN Amro. "Y2K is still an issue -- ignore it at your peril. I think Sun probably exaggerated a bit, but it's going to be a tough period.

Corporate restraints on IT spending, Ross says, will probably last through next February, because 2000 is a leap year. Sun should still grow at a decent clip, largely because e-commerce and storage networking continue to expand, but the company's traditional market of servers for corporate networks will be slowed for at least the next couple of quarters.

Those concerns didn't stop the market from driving up Sun's market value recently, notwithstanding this week's downturn in the stock. Even with this latest blip, Sun's stock chart over the past year remains a steady climb, with the price roughly tripling over the past 12 months.

The company's performance over that time earned that. On a relative basis, Sun remains the best server play around for investors. But not only does the near term have Y2K looming, but long term dangers remain in the form of Windows NT and Linux. "It'll be one to two years before Sun sees a threat from that side ... but past that, it's going to be a different market," Ross says. "We need a little bit more clarity."

For now Sun looks to be fine. The company's Solaris systems remain far more robust than anything Microsoft offers, and that kind of product quality can go a long way. Tomorrow's earnings report, coming on the eve of an expected second half slowdown, should give us a glimpse into how Sun will handle the future.

Other issues:

Silicon Graphics Inc.

(NYSE: SGI) Sun's success largely came at the expense of SGI, which has been the former's polar opposite financially, with losses in six out of the last seven quarters. First Call consensus predicts another report of a loss, in the range of 5 cents for the fourth quarter. SGI hasn't given anyone reason to expect much beyond that.

Insight Communications Co.

(Nasdaq: ICCI) Sure sign of summer boredom: the market is having fun today with the IPO of the eighth-largest cable TV company in the United States. Given that takeover speculation has carried Insight to the top of today's most active stock rankings, you would think shares would get more than a 21 percent boost.

Not that Insight is about to complain about seeing its market value jump by a fifth on the first day. But investors might start whining when no one steps forward to offer a buyout.

Siebel Systems Inc.

(Nasdaq: SEBL) How reliable can you get? Siebel easily topped analyst estimates again in the second quarter, and shows no signs of slowing down. "Our ability to grow is pretty much entirely in our own hands," CFO Howard Graham told ZDII, during a telephone interview this morning.

As for the threat that some observers see from Oracle? "I find it curious that the three long-standing players (Siebel, Vantive, Clarify) in our space never see Oracle, yet Oracle considers itself a major player," Graham says. "I suppose depending on how you define the market, you can come up with whatever numbers you want."

The overall market appeared slightly nervous ahead of this afternoon's scheduled earnings from major Internet companies. With two hours left in regular trading, the Nasdaq Compsite Index clung to a gain of 7.25 to 2739.43, the S&P 500 had inched down 0.23 to 1376.87, and the Dow Jones Industrial Average had fallen 24.69 to 10971.44. 22GO>