Sun salutes Microsoft for delivering Q4 profit

Red ink without Redmond


Sun Microsystems today disappointed investors with lower than expected fourth quarter earnings but showed some positive signs with units shipped increasing and a large check from Microsoft being deposited in its bank.

Sun reported revenue of $3.1bn in its fourth quarter - a 4.3 percent rise over the $3.0bn posted in the same period a year ago. For the full year, Sun pulled in $11.2bn - a 2.2 percent drop from the $11.4bn reported one year earlier. Sun executives pointed to high server shipment numbers, increased services revenue and more sales to key financial services, government and telecommunications customers as drivers of the fourth quarter growth.

"This the first year-over-year growth since (the third quarter of fiscal 2001)," said Steve McGowan, Sun's CFO, during an afternoon conference call.

Sun, however, still posted a loss of $0.05 per share in the fourth quarter - one penny below what financial analysts were looking for. Sun reported a net loss of $169m compared to a $24m gain in the same quarter last year.

Including "special items" such as Sun's massive settlement with Microsoft, this picture changes drastically. With more than $1.9bn of Microsoft money added in, Sun showed $795m in income for the fourth quarter or $0.24 per share. Sun's CEO Scott McNealy urged that that settlement money be considered a "right on" as opposed to a "write off."

"This is a company that is in control," McNealy said. "It is very focused and well-managed."

McNealy's soothing words and Sun's stats kept the financial analysts in a relatively decent mood, during the conference call. Sun did their bidding months ago with layoffs and has been working to trim the bottom line across the board.

The analysts must also have been pleased with Sun's 46 percent year-over-year growth in servers shipped. That's by far the largest jump Sun has seen in many, many quarters. Sun's x86 server shipments rose 327 percent from a small base and had little impact on revenue, meaning Sun's new fleet of UltraSPARC IV-based kit carried the load. Sun's total fourth quarter hardware revenue, including storage and software, came in at $2.1bn compared to $2bn last year.

"First of all, volume matters," McNealy said. "It is the leading economic indicator."

As Sun's server volume increases, the vendor benefits from more component sales, software and services deals and a stronger channel, McNealy added. The CEO, however, was less instructive as to how much all these goodies will add to Sun's bottom line. McNealy declined to set a date for Sun's return to profitability, although at one point during the conference call he did make a vague suggestion that it would be "within this year."

In its fourth quarter, Sun showed some server add-on success. Its services revenue rose to $1.0bn from $979m last year. Sun also saw the number of JES (Java Enterprise System) subscribers jump from 174,400 in the third quarter to 303,100. The going rate for JES is $100 a year per user.

Away from the financials, Sun's President Jonathan Schwartz made a curious comment about the future of Solaris.

"We've begun looking at Solaris on Power (IBM) as well as on Itanium (Intel/HP)," Schwartz said.

"That is not a product announcement," McNealy countered.

It seems the McNwartz is confused.

Schwartz also said that Sun might consider selling x86 servers at below cost if the systems lead to JES and Solaris sales. And McNealy called HP a "hurting cowboy" - a possible jab at Carly Fiorina's Texan heritage.

Sun's shares were up 4 percent to $4.11 during Tuesday's trading and were flat in the after-hours markets, at the time of this report. ®

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