Sun posts loss, still eyes Q4 profit

By Peter Henderson

SAN FRANCISCO: Network computer maker Sun Microsystems Inc. reported on Friday its third-straight quarterly loss as it took a large charge for job cuts and restructuring, but it said things were starting to look up after a hard 2001.

"We're kinda glad to put that year behind us," Chief Executive Scott McNealy told a conference call. "We're making fewer mistakes now," he added, but cautioned that technology spending was still a discretionary item for customers in the short term.

Still, Chief Financial Officer Michael Lehman, said he was increasingly comfortable that Sun could return to profitability in the June quarter, despite tough times in the industry.

Sun, the leading maker of UNIX-based servers used in corporate computer networks and the Internet, posted a fiscal second-quarter net loss of $431 million, or 13 cents per share -- its third loss in three quarters -- compared with a profit of $423 million, or 12 cents a share, in the year-earlier quarter.

Before one-time items including a $511 million restructuring charge, a $39 million charge on investments, and a $218 million tax gain, the loss was $99 million, or 3 cents per share, versus a profit of $494 million, or 14 cents per diluted share, in the year-ago quarter.

Sales dropped to $3.1 billion in the quarter ended Dec. 31 from $5.1 billion a year before -- which was Sun's highest revenue quarter ever -- but rose from $2.86 billion in the first quarter.

Analysts polled by Thomson Financial/First Call had forecast Sun would lose between 2 cents per share and 5 cents per share, on revenues of $3.1 billion.

Sun shares closed down 25 cents, or about 2 percent, to $12.12 on the Nasdaq on Friday afternoon.

Bear Stearns analyst Andrew Neff said the results were encouraging. "Second-quarter results were better than our forecast, the outlook is improving and -- this is key -- Sun's advantage is a simpler model of one operating system and one processor which they can scale," he said.

A look ahead

CFO Lehman told investors in a conference call that Sun would increase sales slightly in the third quarter compared with the second and would "make progress" during the third quarter on its goal of returning to profit in the fourth.

Lehman's outlook was in line with Wall Street's expectations for a loss of 1 cent per share and $3.2 billion in revenues in the March quarter, according to First Call.

"We felt good about the predictability of that quarter (the second), and we feel like we are on track to have another one," he said in an interview.

Higher component costs and relatively low sales to customers still wary to spend on technology have hurt profit margins, but Lehman saw a modest third-quarter improvement in gross margin, or sales minus cost of sales as a percentage of revenue.

The gross margin was 36.6 percent in the second quarter, down 0.3 percentage points from the first quarter and off about 11 points from the year-ago quarter, when Sun was humming.

The prospect of a leaner operation, based largely on lower production costs of machines with the new UltraSPARC III microchip went into high gear, encouraged investors.

"I think Sun was fairly optimistic, fairly upbeat," Tim Ghriskey, a fund manager at Ghriskey Capital Partners said.

Shares of Sun, which peaked a year-and-a-half ago at more than $64, have recovered about 50 percent since technology stocks hit a low at the beginning of October. International Business Machines Corp shares, which have held up much better in the technology downturn, have risen 23 percent since October.

Gray Market

Sun had to defend some of its strategy to analysts. It has scaled back plans to support its Solaris operating system on machines using Intel Corp.'s microchips, but McNealy said Sun would consider further work if it found a paying customer.

He also tried to make a virtue out of an issue that has dogged Sun since the implosion of the dot-com market which it had helped found -- and on which it had depended for growth.

The busted firms are now selling their Sun systems on a gray market for as little as 10 cents on the dollar, he said. "We'll get the upgrades and the service contracts," he promised.

Sun's $6 billion cash stockpile will protect it, McNealy added. "This company took advantage of the (dot-com) bubble big time, and shoot us for doing that, but we built a cash horde."

McNealy also took the chance to tweak Microsoft Corporation. Both are wooing developers to their next-generation platforms for delivering software and services over the Internet. "We're on the side of mankind here," McNealy said.