Blistered in the Sun

THE SUN MAY rise, but it also sets. Investors might be wondering just how dark things are getting at Sun Microsystems (SUNW).

On Wednesday, Edward Zander, Sun's president and chief operating officer, became the third high-ranking executive at the Palo Alto, Calif.-based computer-hardware manufacturer to announce his retirement in the past month. Zander, 55 years old, who has been with Sun for 15 years, will leave the company on June 30.

Sun doesn't intend to name a replacement. Instead, Scott McNealy, Sun's chairman and chief executive, will assume Zander's duties. On Wednesday, he tried to put the best possible face on Zander's departure. In a press release, McNealy said Zander's job could be eliminated because Sun's "business structure has changed, evolving from a portfolio of companies to a single, integrated organization."

Investors weren't buying it. Sun's stock dropped more than 14% on Wednesday — its lowest level in nearly three years on a split-adjusted basis. Shares are down 44% for the year, and some 89% from their August 2000 all-time high of $63, adjusted for splits.

Zander's departure is the latest in a monthlong brain drain at Sun. Last week, the company lost another 15-year veteran when Chief Financial Officer Michael Lehman announced he'll step down on July 1. On April 16, John Shoemaker, the head of the company's computer-systems division, announced he was turning in his corporate credit card and heading off into the sunset.

The mass managerial exodus comes at a time when the tech giant is facing stiff competition and is gushing red ink. Last month, Sun reported a $26 million net loss for its fiscal third quarter, and the company has lost a total of $648 million over the past nine months. Even on a pro-forma basis — an earnings formula that excludes most of the bad stuff on a company's income statement — Sun is losing money, and isn't expected to return to consistent profitability until next year, according to estimates compiled by Thomson Financial/First Call.

Some Wall Street analysts say investors shouldn't let the latest news obscure the fact that Sun is a potential turnaround candidate. In a Wednesday research note, Kimberly Alexy of Prudential Securities called the sell-off "overdone" and said Zander's departure shouldn't be taken by investors as an indication of "deteriorating business conditions" at the company. (Prudential doesn't do any investment-banking work with the company, but Alexy or a member of her household owns Sun shares.)

Others, however, are less sanguine. Richard Gardner of Salomon Smith Barney bluntly told investors in a Wednesday note: "We would not recommend purchase of [Sun] shares on today's weakness." (Salomon has served as an equity underwriter for Sun in the past three years; Gardner doesn't own Sun shares.)

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"We view Zander's departure as a key loss for Sun," says Salomon's Gardner. "Zander was instrumental in planning the strategic direction of the company."