Sun Microsystems work in progress

Question: Please clear up my confusion over Sun Microsystems Inc. Does the company have a good future? — M.L., via the Internet

Answer: This leading supplier of networked computing products, which stumbled badly for several years after the Internet bubble burst, had $89 million in net income in its first fiscal quarter, which ended Sept. 30.

That marked the first time it recorded four consecutive quarters of profits in more than five years. Cost-cutting, which included significant job reductions, has been paying off. It also is gaining market share in its server and storage businesses.

Yet, overall sales growth continues to be slow and the company predicts low to middle single-digit revenue expansion in its current fiscal year.

Sun Microsystems (JAVA) recently enacted a 1-for-4 reverse split in order to raise its low price. Its stock value declined 16 percent in 2007, following a 29 percent gain in 2006 and a 22 percent drop in 2005.

The firm does have plenty of cash and a strong balance sheet. An encouraging sign was the $700 million investment in Sun by KKR Private Equity Investors in early 2007, in which KKR also received a seat on the Sun board.

Sun's businesses include servers, storage, software and services, with two-thirds of its revenues coming from hardware. Its new strategy is to shift away from its longstanding business model of proprietary products.

By open-sourcing its Solaris software and Java software-development platform, Sun believes it can derive more money from hardware and from software maintenance. It has also begun to offer industry-standard x86 computers.

Because results of its changes are uncertain, consensus analyst rating of Sun stock is "hold," according to Thomson Financial. That consists of three "strong buys," four "buys," 10 "holds" and two "underperforms."

An ongoing challenge in the server market is higher-end competitor IBM Corp., with Dell Inc. at the lower end. Hewlett-Packard Co. competes at both ends. These companies have greater financial resources than Sun, which means more product and service depth. Sun also must deal with a growing customer trend of substituting lower-end servers for higher-end ones.

Sun, which has grown largely through acquisitions, remains energetic. It expects to double its sales in China over three years. Japan has chosen it to create an open-source Internet-based architecture to file government forms online. Other nations, including Singapore and Norway, have selected it to manage their information flow.