Sun's Results solid, but KKR Convert Raises Questions
Sun (SUNW) reported a solid 7% increase in revenue for its second quarter, citing good demand for its SPARC chip multithreading (CMT) servers and x64-based servers as well as the increased acceptance of the Solaris 10 Operating System.
More importantly in the tech world, the company showed strong gross margins, coming in at 45%, up from 43% last year.
Sun generated cash from operations of $153 million and had cash and marketable securities at the end of the quarter of $4.8 billion, a lot of cash.
However, despite good cash generation, improved margins and a strong balance sheet, Sun decided to go forward with a $750 million convert with KKR. During the earnings conference call, analysts could not figure out why Sun did the deal.
Jonathan Schwartz, Sun's CEO, said the KKR transaction will allow it to better explore strategic opportunities. He added there could be some cross selling opportunities between KKR's portfolio companies and Sun. Analyst did not appear to believe him.
The reality is the only reason for Sun to need this extra cash is to make a sizable acquisition. Despite an improved operating performance, the growth metrics for Sun, especially within the US, are still weak.
Look for Sun to do another big transaction this year.
January 24, 2007
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