Sun Micro posts narrower quarterly loss

Duncan Martell

SAN FRANCISCO: Network computer maker Sun Microsystems Inc. posted a narrower quarterly loss as revenue rose for the second consecutive quarter on higher sales of server computers and cost cutting.

Analysts said that Sun's strategy of bundling hardware, storage, software and services into single, pay-as-you-go offerings and selling servers using Intel Corp.-compatible chips seemed to be taking hold.

Santa Clara, California based Sun reported a net loss for its first fiscal quarter ended Sept. 26 of $174 million, or 5 cents per share, compared with a year-ago net loss of $286 million, or 9 cents per share. Revenue rose 3.6 percent to $2.63 billion from $2.54 billion.

Chief Financial Officer Steve McGowan said on a conference call with analysts that the revenue growth was driven mostly by sales of servers using four to 24 microprocessors each, the low to upper-mid-range of the Unix server market.

Gross margin, excluding items, was 42.9 percent, higher both from a year ago and the prior quarter, Sun said. Analysts and investors have focused on Sun's gross margin, which has declined in recent years due to higher shipments of lower-cost servers using Intel Corp.-compatible chips and price competition from rivals International Business Machines Corp., Dell Inc. and Hewlett-Packard Co.

"The margins are definitely a positive thing," said Brent Bracelin, an analyst at Pacific Crest Securities. "The fact that these guys did show break-even shows they seem to be serious about keeping costs down."

Excluding items, Sun Microsystems' had a profit of $13 million, or nil per share, better than average analyst expectations. Analysts had forecast a loss of 3 cents per share, on average, within a range of a loss of 6 cents to a profit of 1 cent, according to Reuters Estimates, on revenue of about $2.7 billion.

In addition to the lower costs, McGowan also said that the company now plans to eliminate 3,500 jobs, up from the initial 3,000 it planned when it announced yet another restructuring in April. The company ended the quarter with 32,449 workers.

Sun, which was hit harder in the technology recession than rivals because of its reliance on the telecommunications and financial services industries, now has a full line-up of servers running Advanced Micro Devices Inc.'s Opteron microprocessor and those using Intel chips.

As late as last year, Sun was criticized for what analysts said was a halting embrace of servers using chips other than its UltraSparc processors. The company has also at last settled on a Linux strategy, reselling either Red Hat Inc.'s or Novell Inc.'s SuSe's version of the operating system.

Sun is now emphasizing selling its Solaris operating system on a broad array of servers, even on those made by Dell, and bundling servers and storage with related software and services.

"They're focusing on a cheaper overall platform that simply was not strategically important to them over the last 18 months or so," said analyst Richard Chu of SG Cowen. "The presumption has been that Sun for sure has been marginalized and I think that may not be accurate."

Scott McNealy, chairman and chief executive, seemed to agree. "While we still have more work to do, it looks like we've been underestimated again," McNealy said in concluding his prepared remarks on the call.

In after-hours trade, Sun shares rose to $4.04 on INET. In regular trade on Nasdaq, Sun shares fell 5 cents to close at $3.97, where they have fallen 11 percent so far this year. In the same time period, the American Stock Exchange Computer Hardware index has climbed 30 percent. The stock has plunged from a high of $64 in 2000.