Sun rises beyond slump

The Sun also rises--Sun Microsystems, that is.

Two months ago, the company was in a slump on Wall Street. Analysts questioned the effectiveness of its Java strategy, the viability of network computers was in doubt, and competitors such as Hewlett-Packard were threatening Sun in the server business. Wall Street also was worried about the impact of the Asian economic slump on Sun's business.

These concerns still exist, but the company is enjoying a resurgence in the

Scott McNealy

stock market. Sun shares now are trading higher, and many analysts are upgrading their recommendations on the stock, which is being buoyed by positive response to a corporate reorganization, sales growth of Sun's high-end products, and the delay of Intel's Merced processor.

"Apart from Asia, the result of Sun's momentum seems very much intact," said Laura Conigliaro, an industry analyst for Goldman Sachs. "It continues to plod ahead in key markets, where it still is the company to catch."

Added C.B. Lee, an analyst with Sutro & Co.: "Sun has been doing well. They have moved beyond being just a Unix box vendor. Now you find Sears, Home Depot, Federal Express, even Safeway, using Sun products. These are not engineering-driven companies."

Sun got a psychological boost last month when the U.S. Department of Justice and 20 state attorneys general filed suit against Microsoft, alleging monopolist practices. Sun, which had helped lead the campaign against the software giant, applauded the legal action, saying: "Microsoft could use its monopoly over the gateway to the digital economy--the PC--to stifle competition and innovation in sectors like telecommunications and TV broadcasting."

Microsoft has denied any wrongdoing.

It's still debatable whether Sun's business will benefit from the latest suits, however. Microsoft's Windows NT--which poses a growing threat to Sun workstations--is not part of the legal action, although analysts have speculated that regulators are focusing on NT as part of their ongoing investigation.

On another front, Sun's earnings will be boosted by Intel's announcement last week to delay by six months shipment of the Merced processor, which competes directly with comparable systems from Sun. Intel's problems prompted Morgan Stanley Dean Witter analyst Thomas Kraemer to upgrade Sun's stock to an "outperform" from a "strong buy," because he thinks the company will benefit from Intel's woes.

In the meantime, Sun continues to bolster its product line. Last month, the company announced a new version of its Ultra 60 workstation that uses a faster 360-MHz chip. This week, Sun said that shipments of its high-end "Starfire" server continue to grow, and that it already has shipped more than 500 of the systems.

Many analysts also praise April's corporate reorganization at Sun, arguing that it will sharpen the company's focus. The new structure focuses on unifying the company under divisions, rather than under separate operating companies.

Despite the improvements, Sun still faces many challenges. For example, its Java programming language has not caught on as quickly as many analysts or users had expected, and a legal battle with Microsoft that focuses on Java licensing is still pending.

The company also continues to face pricing pressure in its low-end Unix business, a trend that could cut into profit margins. And while the network computer is not a major factor in Sun's business, that technology has not gained acceptance as rapidly as predicted.

As for the roll-out of new products and services by Sun's competitors, "The company expects [competitive] pressure to continue and intensify throughout the remainder of fiscal 1998 and into fiscal 1999," Sun said in a regulatory filing last month.