Sun says on target but shares hit

Peter Henderson

SAN FRANCISCO: Sun Microsystems Inc. executives said the high-end computer

maker would hit quarterly targets, but the firm's shares fell on Thursday in a

jittery market used to Sun beating expectations.

Executives said the Palo Alto-Calif. based firm, known for its scrappy,

competitive spirit and sophisticated server computers - the workhorses of the

Internet - would grow sales well over 40 per cent this quarter, compared to a

year earlier.

"Demand is strong, there is no change from the last quarterly

call," president and chief operating officer Ed Zander said on a

mid-quarter conference call, advising analysts that targets had not changed.

Bear Stearns analyst Andrew Neff said business was going well as usual for

Sun - known for its conservative guidance to the investor community - and blamed

its share weakness on the wider market. The tech-laden Nasdaq tumbled 133.61

points, or 4.22 per cent, to 3,031.88 on Thursday.

"They could have discovered oil in their new building and it wouldn't

have helped," he said.

"Last quarter they said things were accelerating in their mid-quarter

conference call," Neff said. "They didn't say that this time. Some

could take that as a negative but I think they are just always

conservative."

Sun shares closed off $6-11/16, or just over 7 per cent, to $87-1/4, but

ticked up to $89 after hours on the Instinet trading system.

Sun paying more for components



Sun said it was paying more for extra components, pressuring profitability, in
order to fill unexpected demand rather than protecting profits by selling only

units for which it could get cheaper parts or lose those sales to rivals such as

Hewlett-Packard Co. or International Business Machines Corp.

"In Q2, we are expecting that our revenue growth rate will be in the

high 40s," chief financial officer Mike Lehman told the conference call,

regarding the year-on-year percentage change for Sun's fiscal 2001 second

quarter, which ends in December.

"We continue to expect the annual revenue growth rate would be in the

mid-30s," he added in the call, which began while the market was still

open. "We think Q2 margins will look a lot like Q1," he said.

Gross margin, a measure of profitability, was 48.2 per cent in the first

quarter. Lehman said the margins were set to improve slightly in the second half

of the fiscal year.

Sun, which concentrates on high-end computers that form the backbones of

sophisticated networks and serve up Web pages, faces a market filled with doubts

brought about by an uneven earnings season.

IBM missed sales targets in its last quarter and H-P, which competes with Sun

in the server market, missed profits by nearly 20 per cent in results reported

this week.

Even many firms that have met their targets recently have been punished in a

market sensitive to any hints that sales would slow or a price war could erupt.

Zander emphasized that margins were being squeezed by Sun's efforts to fill

order backlogs and search for market share but not by price competition, and he

said that Sun's high-end computers were in a different market from that for

personal computers, where price war concerns are centered.

(C) Reuters Limited 2000.