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Sun Shares Slip After Reporting 2Q Loss

Posted on: Wednesday, 25 January 2006, 12:00 CST

By MATTHEW FORDAHL

SAN JOSE, Calif. - Sun Microsystems Inc. shares slipped Wednesday after the server and software maker reported a loss for its fiscal second quarter on higher costs and accounting charges.

Sun shares fell 7 cents, or 1.6 percent, to $4.30 in morning trading on the Nasdaq Stock Market. The Santa Clara-based company reported its financial results after the market closed Tuesday.

In the report, Sun said demand is picking up for a number of its latest products, including servers running its new power-efficient UltraSparc T1 chip and others based on processors from Advanced Micro Devices Inc.

"The backlog is the highest in years and this increase in bookings and demand is driving improved business fundamentals," said Scott McNealy, Sun's chief executive. The company, following its usual practice, did not release a forecast for the current quarter.

For the three months ended Dec. 25, the company lost $223 million, or 7 cents per share, compared with a profit of $4 million, or break-even per share, in the same period of its previous fiscal year.

The loss includes $145 million accounting adjustments related to last year's acquisition of Storage Technology Corp. and SeeBeyond Corp., a business software integration company. It also reflects a $10 million restructuring charge, $55 million to expense employee stock options.

Driven by revenue from the newly acquired companies, sales jumped 17 percent from $2.84 billion in the year-ago period to $3.34 billion.

Analysts were expecting Sun to lose a penny per share on sales of $3.49 billion, according to a survey by Thomson Financial.

Sun has struggle to sustain profitability since the high-tech bubble burst in 2000 and its traditional business of high-end, Unix-based servers lost customers to companies that offered less expensive hardware and software.

After several strategy shifts, Sun now offers servers based on so-called commodity chips and has even gone as far as giving away its software. It continues to offer higher-end systems and made a major leap into storage systems with its purchase of Storage Technology last year.

Still, sustained profitability has remained elusive.

"We believe that Sun clearly should be more profitable than it is," UBS analyst Benjamin Reitzes said in a recent research report. "However, the mix shift to lower-end products and the continued pace of heavy investments may continue to pressure operating profits."

In the most recent quarter, Sun also had trouble meeting demand for higher-end servers running its UltraSparc IV+ chip, McNealy said.

"We just underestimated how attractive the UltraSparc 4+ product line would be," McNealy said. "We didn't order enough. ... We expect to get caught back up by the end of this quarter."

Total second-quarter product reviews rose 14 percent to $2.11 billion, up 14 percent from the same period in 2004. Within that category, computer systems revenue fell 5 percent, to $1.44 billion.

Data management product sales increased 100 percent to $670 million, while service revenue totaled $1.13 billion, up 23 percent.

For the first six months of the fiscal year, Sun has lost $346 million, or 10 cents per share, on sales of $6.06 billion. That compares with a loss of $129 million, or 4 cents per share, on revenues of $5.47 billion for the same period ending Dec. 26, 2004.

Source: Associated Press/AP Online

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