Sun Micro warns capex slowdown has hit sales

PALO ALTO: Network computer maker Sun Microsystems warned on Thursday that a

slowdown in capital spending had hit the US demand and lowered its sales and

profit targets for the current third fiscal quarter.

The company, a bellwether for the technology sector, cut its sales growth

forecast to 10-13 per cent for the current quarter; down from the near 30 per

cent growth that Wall Street had expected.

Sun now projects it will earn only 7-9 cents per share in the quarter, chief

financial officer Michael Lehman told a mid-quarter conference call. Wall Street

had expected earnings of 15 cents per share, according to First Call-Thomson

Financial.

"We are disappointed with one and only one thing, and that is the US

economy," chief operating officer Ed Zander told analysts on the conference

call. "I think there is a broad based downturn in capital spending."

Sun has been under pressure for months as the economic slowdown has spread to

major corporations, which were expected to continue boosting information

technology spending to increase their efficiency despite the downturn.

Zander said major firms were slowing technology infrastructure buildouts,

reacting to a combination of the weak economy and the demise of

"dotcoms", start-ups which had heightened competitive pressure on the

older companies to spend on technology.

Sun shares slipped below the 52-week low close in after-hours trade on

Instinet, dropping to $18-7/8 from $20-13/16 at the Nasdaq close. The stock has

fallen 32 per cent in the past week as concerns have mounted over the company's

outlook and its level of sales inventories.

Lehman said that Sun's gross margin would decline by 2-3 percentage points

from the second quarter to about 45 per cent and revenues would rise only 10-13

per cent year-on-year in the third quarter.

He declined to make forecasts for the fourth quarter: "We are not in a

position for clear guidance," Lehman said. But Sun said it would continue

research and development spending at close to previously expected levels in

order to maintain and build its competitive position as the world's number one

server company.

Sun will do better than its competitors, Lehman said, adding that it had

allocated up to $1.5 billion on a stock buyback program. He told analysts that

there had been no major change in Sun's sales channel inventory and that

component inventories were running "relatively flat" in the current

quarter as compared to the second quarter.

There is also no sign of customers canceling back orders, he said. Sun

officials said they had decided to lower guidance when it became clear that

sales were not gaining ground in February as expected.

In typical quarters, Sun makes 20 per cent of its sales in the first month,

30 per cent in the second and the remainder in the final month.

(C) Reuters Limited 2001.