Sun Micro meets Q2 profit target, sales just miss

Peter Henderson

PALO ALTO: Sun Microsystems Inc. reported on Thursday profits that met Wall

Street forecasts but a 44 per cent rise in sales just missed higher expectations

as the network computer maker felt a downdraft in demand.

Sun's sales for the remainder of the fiscal year could be slightly less than

predicted earlier, but new products and a tougher economic environment would

catalyze Sun’s market share gains, executives forecast.

"The clearest statement I can make about Q2 is that we experienced an

unexpected downward change in the level of projected demand in the US in the

month of December," chief financial officer Michael Lehman told a

conference call.

"We experienced this change rather suddenly and without much

warning."

Sun, which resisted an industry-wide trend to lower forecasts for this

quarter in the face of economic weakness, said operating earnings, excluding

one-time items, were $552 million, or 16 cents a share, against $354 million, or

10 cents a share, a year ago.

Sales at the Palo Alto, Calif.-based firm rose to $5.12 billion from $3.55

billion in the year ago quarter. Analysts on an average had expected Sun to turn

in operating profits of 16 cents a share on sales of $5.29 billion, First

Call/Thomson Financial research reported.

Sun's shares ticked down in after-hours trading, but maintained most of the

gains made during the day, before results were announced. They dropped to

$34-7/16 on the Instinet system from its $34-7/8 close on Nasdaq, where it had

gained $2-1/2.

Growth target eased



Lehman slightly lowered his revenue growth forecast on Thursday to 30-35 per
cent this fiscal year. He previously had said revenues for the year would be in

the mid-30 per cent range, but investors were sympathetic.

"Sounds like they are doing great compared to everybody else. They

managed to squeak out the profit they said they were going to," said Debra

McNeill, a portfolio manager at Fremont Investment Advisors, which manages about

$230 million, a third of which was technology firms.

Fremont has kept Sun holdings steady, with slight trimming, recently at about

27,000 shares.

"There have been so many revenue disappointments (by other firms), that

I don't think this is something that is going to significantly affect the stock

price," she added, calling the new revenue forecast respectable.

Sun is in the unusual position of missing expectations and lowering

forecasts.

It has long said it would not be able to maintain fiery growth rates but

nevertheless outperformed expectations.

"Sun is like the boy who called wolf," said Lehman analyst George

Elling. He said Sun's story was still compelling and that it looked ready to win

market share.

That was the argument put forth by Chief Executive Scott McNealy, who said a

slower economy and Sun's new product mix could hone the company's competitive

edge.

"I always prefer the tough times. It's where we can weed out the

followers from the leaders," he told the call.

"We are sitting here trying to apologize for 44 per cent, mid-30s,"

added chief operating officer Ed Zander, commenting on the revenue growth and

growth target, "but at the end of the day it is market share."

Sun's high-end servers have been doing well, while it launched low

end-machines designed to take on lower end machines and compete with high-end

Intel-based machines running the Windows architecture.

Lehman said that the gross margin of sales to cost of sales would be steady

from the first half into the third quarter and then improve as component prices

fell and new products began to ship in volume. Gross margin was 47.8 per cent in

the second quarter.

Sun has outperformed the American Stock Exchange computer hardware index .HWI)

by nearly 35 per cent since the beginning of 2000. Whereas the index has fallen

30 per cent in that time, Sun is down only about 10 per cent.

(C) Reuters Limited 2001.