Sun Micro posts loss, sees profitable next quarter

By Peter Henderson

SAN FRANCISCO: Sun Microsystems Inc. on Thursday reported a narrower-than-expected third-quarter loss and said it would shed 1,000 jobs because signs of renewed interest among its corporate clients would not translate into a fast rebound in sales.

The Palo Alto, California-based maker of sophisticated servers that run corporate networks was stunned by the dot-com meltdown last year and reported its fourth straight quarterly loss, but it stuck to its forecast of returning to a profit in the current quarter, ending in June.

Sun posted a fiscal third-quarter loss of $37 million, or 1 cent per share, including $11 million in one-time charges, compared with a profit of $136 million, or 4 cents per diluted share, in the quarter a year earlier. The loss before items, at $26 million or 1 cent per share, came in at the optimistic end of Wall Street forecasts, and was an improvement on the second-quarter loss of $99 million, or 3 cents per share, as Sun had forecast.

Analysts polled by research firm Thomson Financial/First Call had expected losses ranging from 1 cent to 4 cents per share, with the consensus estimate a 2-cent loss on sales of $3.2 billion. Revenue in the quarter was $3.1 billion after $4.1 billion a year earlier and $3.1 billion in the second quarter.

The company also stunned analysts with a 5.5 percentage point improvement in gross profit margin, a closely watched figure which represents sales minus the cost of sales as a percentage of revenue. That hit 42.1 percent, an improvement the company said was from trimmed inventories, finishing product transition and lower component costs, among other things.

"A lot of the bear case about Sun is that they'd never be able to recoup their gross margin. The game was over, it was going to be a commodity product. And here, even in sort of this extremely price-competitive environment, they managed to improve their gross margin," said J.P. Morgan analyst Daniel Kunstler.

Shares of Sun, which closed up 3.5 percent, or 29 cents, at $8.52 on the New York Stock Exchange, fell in after hours trade to $8.25, in line with a number of other leading technology shares.

Sun executives gave a mixed picture of corporate clients, who have been sitting on the sidelines for more than a year waiting for the economy to improve.

"There is a lot more activity," Chief Financial Officer Michael Lehman told reporters in a conference call. "The big question is will that activity translate into purchase orders. That remains to be seen... We are not seeing a massive increase in IT (information technology) spending."

Tim Ghriskey, president of Ghriskey Capital Partners in Greenwich, Conn, said Sun's slimmer loss was a positive surprise. "They have not seen improvement in spending on technology and but at least it appears things are not getting any worse than they have been and the fact that they made good progress is favorable," he said.

Lehman said Sun's inability to improve revenue in the quarter from the previous one was better than competitors had done and stuck to his prediction that Sun would turn a profit in the June quarter, adding that it would improve revenue and gross margin slightly from the third.

Sun, which cut 9 percent of its work force, nearly 4,000 people in a move announced last November, would use attrition to cut another 1,000 or so in the next six to nine months from the current level of nearly 39,500, he said.

But Sun would not need to take charges, since the cuts were much less than the roughly 5 percent natural attrition that Sun is experiencing even now in a tough job market, he said.

Chairman and Chief Executive Scott McNealy, who has spoken at conference calls during recent quarters as Sun's business worsened, had been scheduled to join the call on Thursday but did not. Lehman said he was on vacation.

(C) Reuters Ltd.