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Sun downgraded to Goldman Sachs sell list

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The stock and probably the collective psyche of server and operating system maker Sun Microsystems is taking some hits today as an IT watcher at Goldman Sachs put the company on its sell list.

Sun has been on a lot of sell lists in recent years, of course, as it has struggled to even maintain sales, much less get profits, in cut-throat server hardware and operating system software markets. Despite respectable engineering and pricing on x64 hardware and the open sourcing of its Solaris operating system - and some would say because of this - growth and profits have eluded Sun, and Wall Street and the company's key investors have lost patience.

According to a report from the Associated Press, analyst David Bailey has added Sun to its Americas Sell List - not a contest that any publicly traded company wants to win. Because Sun is heavily concentrated on the financial services, telecommunications, and manufacturing industries, Bailey reckons - as do many of us out here on the other side of the Sun firewall - that the company can be disproportionately and more severely hit by a recession like the one we are having now.

To that end, Bailey told Goldman Sachs customers in a research note that he expected a low-double digit revenue drop for Sun in fiscal 2009 ending in June year, thanks to the recession and the ongoing decline in the Unix server market. Bailey moved his target Sun stock price down from $5 to $3 a share and moved the stock from the hold to the sell column. Bailey said further, according to a report in Barron's, that he expects Sun to lose 59 cents a share in fiscal 2009 (compared to a 26 cent per share loss in earlier estimates) and for the company to bring 37 cents a share in profits to the bottom line in fiscal 2010 (down from an earlier 76 cent per share estimate).

As we go to press on Thursday afternoon, Sun's shares are down 12 per cent to $4.48 a piece, giving Sun a market capitalization of $3.76bn. The company's shares were trading at a high of over $18 a pop in late February 2008, so a tremendous amount of value has vaporized - only some of it attributable to the economic downturn.

Sun was in trouble before the economic meltdown, and it has not been helped by the turmoil in the financial services industry and the recession in the United States. That said, the company's stock has rebounded from a low of $2.60 a share just before the Thanksgiving holiday in America, so not only could things be worse - they have been.

Sun reports its financial results for its fiscal 2009 second quarter on January 27 after the market closes.

Back on November 14, which seems a long time away, Sun announced it would be slashing between 5,000 and 6,000 jobs in an effort to get its revenues and costs more in line. That is between 15 per cent and 18 per cent of the company's 33,400-strong global workforce, which will remove somewhere between $700m and $800m in costs from the books. Not counting restructuring charges, the layoffs should put Sun in the black - provided revenues hold up at around $3bn a quarter. That is not a foregone conclusion anymore, at least not for Goldman Sachs' Bailey and the people who are selling Sun stock today.

As part of the restructuring announced in November, Sun also said that it was splitting up its newly created Software Group into pieces and spreading bits of it into three new groups: Systems Platforms, Application Platform Software, and Cloud Computing and Developer Platforms. The idea is to get rid of some management layers and get Sun focused on customer accounts and make it more easy to buy products from. Sun has not, as yet, detailed where the job cuts will be made or what development projects will be killed off as part of the restructuring.

But the scuttlebutt is that the future "Supernova" servers and their "Rock" UltraSparc-RK processors might not see the light of day. Thus far, there have been no indications from Sun insiders that Rock and its servers are not going to be announced in the second half of this year. But it is easy to imagine Sun chucking it in and just using Fujitsu's Sparc64 processors for SMP-style boxes, its Sparc T series of chips for workloads that like lots of threads, and x64 chips for those customers who want to go that way. ®

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