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Sun Blocked

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Slowing economy causes Sun Microsystems to miss on estimates.

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It turns out the Sun isn't so bright after all.

Sun Microsystems (JAVA) reported third quarter results after the bell on Thursday. The California based company laid blame on the sluggish U.S. economy for what can only be described as lackluster results.

As per the press release:

Q3 revenue came in at $3.26 billion. That's a decline of 0.5% from last year's $3.28 billion. Meanwhile gross margins were 44.9% - a less than 50-basis point improvement over last year. Sun reported a $34 million or four cent a share loss for the period ended March 30. In the comparable period a year ago the company had generated a gain of $67 million or 7 cents a share.

To be fair, the quarter wasn't as bad as it seemed at first blush. That's because Sun booked a $52 million tax provision in the period (as opposed to a benefit of $3 million last year). Additionally, it took a four-cent hit related to its recent pickup of open source database, MySQL. But no matter how you slice it, its numbers were still a disappointment given that the Street expected 18 cents per share.

Making matters worse, Sun put the kibosh on fiscal fourth quarter as well, saying it plans to take a charge of between $130 and $220 million to account for job cuts. More specifically, it plans to trim between 1,500 and 2,500 positions. What's unclear, however, is whether or not management will write off any assets, or take any other charges (in addition), since the results for this fiscal year are pretty much already damaged goods.

Beyond the economy, another potentially significant risk to Sun at this point could be the analyst community, and more specifically its reaction to the quarter. In late 2007 two big name houses -- Bernstein Research and Citigroup -- upgraded the shares, and in late April Lehman Brothers initiated with an "Equal-Weight" rating.

The point: In the days and weeks ahead, there's a chance we could see some negative research disseminated (possibly some downgrades and not so kind notes) that could have a further adverse impact on the stock.

As far as the potential broader meaning of this news, Sun's CEO, Jonathan Schwartz, reportedly pointed out that the company saw some order delays from domestic customers. He specifically pointed out weakness in retail and telecom. Might Schwartz's comments be a harbinger of things to come? Sun isn't quite considered to be the bell-weather it once was. However, investors in those sectors should keep their eyes peeled. So should shareholders of Hewlett Packard (HPQ) and IBM (IBM).

The potential upshot to the Sun story is that taking sizable charges in the fourth quarter could make next year's results appear as pure as the driven snow. However, its important to note that in order to really juice the stock again and get the investment community to warm to the story, its probably going to have to find a way to drive its top line.

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No positions in stocks mentioned.

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