December 12, 2000 3:00 PM PST

Stock slips as Sun's glow fades

Analysts have stepped back from their gung-ho views of Sun Microsystems, as the company faces stiffer competition and tries to boost year-end sales.

Banc of America Securities analyst Kurt King downgraded Sun on Tuesday from a "strong buy" to "buy," citing slowing overall market demand. Companies that sell Sun servers have been offered a 3 percent rebate from the company, noted UBS Warburg analyst Don Young.

The cautious notes are a turnaround from the high praise that has been heaped on the Palo Alto, Calif., server and software company in recent quarters. In July, analysts variously described Sun's performance as "breathtaking," "superlative," "unbelievable" and "stunning."

"Standards for Sun are uniquely high following four straight quarters of revenue upside surprises and estimate increases," King said in a research note. "We think failure to extend this streak could be viewed by many investors as a negative turning point following a year of nothing but positive trends."

And the pressure is mounting. IBM and Hewlett-Packard in particular have been working hard to regain their former lead over Sun in the Unix server market.

HP chief executive Carly Fiorina last week voiced her strongest words yet about the company's Unix server business. She said 2001 will be the "payback" for investments in the company's Unix server line.

IBM, which analysts see as reinvigorated, also is pushing hard. The company boasted that it won a place at Great Northern Consulting Services, a Midwest computer reseller with 400 accounts that now will sell IBM as well as Sun products.

In addition, IBM has wooed Banc of America, Budget Rent-a-Car and Network Solutions away from Sun, IBM said.

Sun shares were pushed down last week by rumors of accounting irregularities, several analysts said. In a statement released Monday, Sun chief financial officer Mike Lehman dismissed the reports.

"Over the last few days, there have been rumors in the market to the effect that Sun Microsystems...has experienced 'accounting irregularities' or 'revenue recognition' problems. These rumors have no basis in fact and are false," Lehman said in a statement.

Buckingham Research Group analyst Jay Stevens noted HP's upcoming Superdome machine and new mainframes from IBM as particular challenges.

On top of that, Sun must sell existing servers built on its UltraSparc II chip to make way for UltraSparc III systems on the way.

"Sun needs to discount the existing Ultra Sparc II-based line in order to maintain customer interest until its high-end Ultra Sparc III-based hardware is available in the June quarter," Stevens said. "The playing field is now very different for Sun, with HP and IBM pushing hard to move boxes."

Stevens hasn't changed December quarterly profit and revenue projections for Sun, but "the concern for us is about guidance for the March and June quarters," he said in a note.

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