Sun misses Q3 sales target, unsure on economy

Peter Henderson

SAN FRANCISCO: Sun Microsystems Inc. missed a lowered sales target in the third quarter, and although profit was in line with forecasts, the network computer maker said it was not clear if the economic downturn it blamed for slow sales was ending.

Scott McNealy, the chief executive, told a conference call that the economic outlook was uncertain and companies had to learn to adjust to sudden changes in the business climate rather than the smooth cyclical swings of earlier days. "The real issue is can you turn on a dime as the needle starts slamming back and forth."

Sales at Sun rose two per cent to $4.1 billion from $4.0 billion last year in the third fiscal quarter, while operating earnings dropped by nearly half to $263 million, or 8 cents per share from $464 million, or 14 cents per share, in the quarter a year ago. "The results, sales and gross margins in particular, are a big disappointment versus expectations set in February. Clearly the environment for Sun's customers has deteriorated much more dramatically than they thought possible," said Sanford Bernstein analyst Toni Sacconaghi.

Sun had predicted on Feb. 22 that it would earn 7-9 cents per share on a 10-13 percent year-on-year rise on sales, ranges that were below Wall Street's expectations at the time by as much as half. Analysts had dropped their forecasts by this week to earnings in a range of 3-13 cents, and Sun said the consensus adjusted to conform with its own reporting changes that was cited as 8 cents.

Sun soared over the last few years as firms threw together networks of its high-end computers to come to terms with the Internet, but the sudden technology slowdown has savaged growth rates that used to be the envy of the industry. Revenue growth had accelerated to 60 per cent in the first quarter of this fiscal year before the economic speed bump slowed it to the single digit crawl of the recent quarter.

"Our results reflected the sharp decline in capital spending in the information technology sector, principally in the United States, although we did see some moderation of demand in Europe and Asia Pacific," Michael Lehman, Sun's chief financial officer and executive vice president, said in a statement.

Outlook mixed

Lehman told a conference call that revenue would rise slightly in the fourth quarter, compared to the third, with per share earnings flat to slightly down. But revenue would rise 15 percent next year and per share earnings would grow faster. Sun would screw down costs further to preserve research and development funds but even so much of next year's growth would be in the second half.

Much of next year's rise was based on Sun's ability to outshine competitors, he told Reuters in an interview. "It is largely driven by the relatively competitive position. It certainly is somewhat predicated on a healthier macroeconomic conditions in the second half of the fiscal year," he said.

The gross profit margin, the profit after cost of sales as percentage of revenue, was 41.6 per cent in the third quarter and would take a couple of quarters to return to the high 40s, Sun's long-term goal, he told the conference call. Gross margins should improve slightly in the fourth quarter.

But competition might sour those expectations even after the economy improved, said Michael Cohen, co-manager of the $2 million Alpha Analytics Digital Future Fund. He said some investors were probably relieved Sun did not miss targets by more and impressed, perhaps, that it forecast so far ahead. But he pointed to competitive pressure on Sun and executives' comments on economic uncertainty. "It looks like they hedged their bets," he said.

(C) Reuters Limited 2001.