While S&P did indeed downgrade the corporate credit rating on Sun from BB+ to the BBB junk level after having Sun on credit watch since October 17, 2003, the company made it clear in a statement that the outlook for Sun is stable and that Sun only had $1.3bn in debts outstanding as of the end of 2003.
The people at Sun who have not been laid off as Sun’s revenues have declined and profits have vanished can thank its managers for only spending a smidgen of its $6bn cash hoard in the past four years since the dot-com bubble burst. That cash is what still gives Sun plenty of maneuvering room, and it would only have taken one seemingly logical (at the time) all-cash deal a few years ago to have put Sun in a real bind today. That didn’t happen, and that cash is what allows Sun to be relatively cool as it remakes itself to sell in a much more aggressive Unix and Linux world. Sun’s prospects are brightening, but it faces some big challenges, and the S&P downgrade is just one indicator of the magnitude of the challenges.
The downgrade reflects weak and inconsistent profitability, and our expectation that Sun will be challenged to profitably expand its market presence, said Standard & Poor’s credit analyst Martha Toll-Reed in a statement accompanying the downgrade. She said that while Sun has moderate debt levels and ample liquidity – Sun’s cash pile is still more than $5bn high – S&P reckons that Sun has a good but not leading position in the very competitive global server market, a more narrow revenue base than its biggest competitors (IBM Corp and Hewlett-Packard Co have much larger server businesses, and Dell Inc is trying to knock Sun out of the number three spot), and inconsistent profitability.
Despite continuing year-over-year revenue declines, ongoing cost-reduction efforts have enabled Sun to maintain largely positive EBITDA, the S&P statement read. However, Standard & Poor’s does not expect profitability to return to historical levels in the near-to-intermediate term, given fierce industry price competition and Sun’s high R&D investment rate. Perhaps more telling was the final comment that S&P expected Sun would maintain a cash and marketable securities hoard in excess of $3bn, which seems to suggest that S&P expects that Sun may dip into its cash to push it to profitability a little more than anyone might be thinking.
Investors in Sun seemed to take the announcement in stride, with the stock falling about 55 cents between Friday morning and Monday evening. Sun stock is now trading in the neighborhood of $4.75, giving the company a market capitalization of about $15.8bn. While this is obviously a lot lower than the $200bn market cap Sun had in the go-go days of the dot-com boom, it is considerably better than a year ago when Sun was trading for around $3 a share and the company’s market cap was only $10.5bn even though it had more than $6bn in the bank.
This article is based on material originally published by ComputerWire
