Revised Outlook Clouds Sun’s Prospects

Recognizing sluggishness in core IT hardware and software spending, Sun told the financial community Thursday to revise downward their estimates for Sun's fiscal third quarter, which ends March 30, 2001.

Showing concern over economic slow down in the U.S., Sun officials attempted to sound bullish over the company's prospects for revenue the quarter. But executives said necessary adjustments needed to be made to anticipate potential lags in revenue, which won't grow as quickly as it did last year. Sun now expects growth for the fiscal third quarter to come in around 10-13 percent, down from last year's rate of 35 percent.

Following the company's disclosure, Sun shares slumped to $18.88 in after-hours trading, a 52-week low. Just a few weeks ago, shares traded in the mid $30s. But that was before Sun and the rest of the world recognized how quickly the market has changed.

"Business outside the U.S. continues to track our expectations, however, with around 50 percent of the revenues coming from the U.S., those numbers still drive our overall results," said Michael Lehman, vice president of corporate resources and CFO.

"Even at the revenue levels just mentioned, we will continue to grow anywhere from two to three times faster than our principal competitors," he added.

On a positive note, Lehman said the company will increase spending in research and development in Q3 and Q4, and add between 1,500 and 2000 employees in R&D, sales and enterprise services departments. But Sun will not hire as many people across the company as it did in previous quarters.

"We are going to grow our R&D spending in Q3 by north of 20 percent on a year over year basis," said Lehman. "We are slowing the rate of growth in G&A and other parts of the business to reflect the lower revenue growth rates. We will continue to grow our R&D spending at a significant rate in Q4 versus the prior year as the creation of intellectual property is one of the cornerstones of our competitive advantage."

During Sun's analyst meeting 16 days ago, executives briefed analysts on the company's business model, financial strategy and market opportunities. Lehman said little had changed in their overall plans from that time.

"We are quite confident in our strategy and are positioned as one of the very few companies that have the intellectual property to scale in relationships to benefit from the ongoing worldwide build-out and usage of the Internet infrastructure," said Lehman. "We are much less concerned about the near-term impact of a U.S. recession on our Q3 financial model. This U.S. recession is what we and others in our industry are coping with."