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Sun Microsystems Returns to Profit for Its Second Quarter

Posted on: Friday, 14 January 2005, 03:00 CST

Jan. 14--Sun Microsystems returned to a profit for its fiscal second quarter, but revenue fell slightly, as the developer of network servers and software attempts to turn itself around.

Revenue at the Santa Clara company fell to $2.8 billion, a drop of about 2 percent, compared with almost $2.9 billion in the same period a year ago.

Net profit for Sun's fiscal second quarter ended Dec. 26 was $19 million, or 1 cent a share, compared with a loss of $125 million, or 4 cents a share for the second quarter a year ago.

Analysts had been forecasting that Sun would report a profit of 1 cent a share, excluding charges, according to First Call Thomson consensus estimates. They also had forecast that Sun's revenue would grow slightly, about 1 percent, in the quarter. Sun does not give Wall Street guidance anymore on future quarters.

"I'm thrilled to death that we generated a profit," said Jonathan Schwartz, Sun's president and chief operating officer, in a phone interview. "We told Sun employees to go out and make money." The company also reported a slight profit in its first quarter.

Wall Street, however, was disappointed with the results, especially the revenue decline. Shares of Sun in after-hours trading fell 3.9 percent, or 18 cents, to $4.40.

The latest quarter included a charge of $24 million for previously announced workforce and real estate restructuring, a $9 million gain on equity investments, and a $6 million benefit for related tax effects.

In the past two weeks leading up to Sun's earnings announcement, two analysts -- Steve Milunovich at Merrill Lynch and Toni Sacconaghi at Sanford Bernstein -- had issued reports telling investors not to expect a great second quarter.

Sun's stock has run up since last quarter's profit, amid investor expectation of a financial turnaround. Sun has seen sales erode sharply since the dot-com and telecom meltdown, and has suffered a string of quarterly losses as its customers either went out of business or halted spending on new, high-performing servers and software.

As part of its comeback strategy, Sun has now begun selling the higher-volume, lower-cost servers designed around both Intel and Advanced Micro Devices chips, also known as x86 architecture. The company would not disclose any specific unit or revenue numbers, but said sales of these high-volume products were up 160 percent in the second quarter. But those sales are still not yet material to the company, executives said.

One analyst asked during the company's conference call if Sun had been unable to get products out the door in the quarter, and if that would explain the slight decline in revenue during what is typically a seasonally strong quarter for the industry.

But Chief Executive Scott McNealy said that was not a factor. "You really have to look at revenue, backlog, book-to-bill and deferred revenue all together -- that points to a fairly stable demand picture," McNealy told analysts. "There were no going-out-the-door, end-of-quarter availability issues."

Schwartz added, however, that in North America, there was some weakness in December. But both executives added that they see a great deal of confidence among customers in Sun's road map.

"The discussion with the customer base is very different than it was three years ago," McNealy said. "Three years ago there was no discussion; two years ago it was, 'You guys have to get your act together'; one year ago it was 'Are you guys going to make it?' Now, it's 'How do we get there?' "

Sun did not see any revenue impact yet from its launch of Solaris 10, the biggest upgrade of its core operating system in years. The software was launched in November, but won't be fully available until later this month to customers who pay for services and support. The software can be downloaded now for free, without support. Solaris 10 will run on Intel and AMD-based systems, and can run Linux applications. Based on free downloads so far, Sun said that more non-Sun customers are downloading Solaris 10, which will open the door for more potential hardware sales.

"There are some negatives, there are some positives," said Brent Bracelin, an analyst with Pacific Crest Securities, who does not own Sun stock but recently upgraded its shares. "For a company in the beginning stages of a turnaround, that is expected."

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Source: San Jose Mercury News

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