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Sun erases fourth quarter profit with $1 billion charge

First quarter looking grim

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Upon further review, Sun Microsystems has altered its fourth quarter financial figures to show a net loss of $1.04 billion where it once posted a $12 million net gain.

This rather drastic shift comes as a result of a $1.05 billion non-cash charge in its fourth quarter, which ended June 30. The charge was taken "to increase a valuation allowance for its net deferred tax assets in accordance with the Statement of Financial Accounting Standards (SAFS) No. 109," Sun said in a statement. Basically, Sun's first fiscal quarter, which just ended, came in worse than expected, so the company has made an adjustment to offset some of the loss.

Sun had reported a $12 million profit in the fourth quarter of 2003, but this now becomes a $1.04 billion or $0.32 per share loss.

The Sun statement explaining the accounting move was written in what you might call "things have gone terribly wrong speak," which made it tough to understand. Thankfully, an industry analyst provided a clear explanation over on TheStreet.com.

"You're only allowed to record the benefit from a deferred tax asset if you're more than 50% confident that you will have taxable assets in the future that are sufficient to absorb it," Robert Willens, an accounting and tax analyst at Lehman told TheStreet.com. "What they're telling you is that their level of confidence in their ability to generate taxable income in the future has taken a turn for the worse; their level of confidence has dipped below the 50% line. It's clearly not a positive development. The larger the valuation allowance, the lower your confidence level in your ability to generate any sort of income."

Sun is expecting to post a first quarter loss of between $0.07 and $0.10 per share. Sun said the period has been "a particularly difficult quarter for the company due in part to intense market and competitive dynamics." Analysts were looking for Sun to report a loss of $0.02 per share for the quarter.

Sun has been struggling to reach profitability over the last couple of years, as the company has been hit hard by a slowdown in hardware spending. In recent quarters, main rival IBM has managed to scoop up some of Sun's share in the prized market for Unix servers. In addition, analysts charge that Linux servers pose a threat to Sun's Unix business.

To help offset the decline in sales, Sun this month announced that it would layoff 1,000 workers.

In addition to cost-cutting measures, Sun is trying to boost software sales with its new Java Enterprise Systems and Java Desktop System software packages. Both sets of software are priced well below what rivals offer and could spark growth for the company.

The earnings revision, however, comes as a major blow. Sun has wiped out one of its few profitable quarters in recent memory. The company is also saying that things are looking worse than expected. The first fiscal quarter report is due out in mid-October.

Investors punished Sun shares in after-hours trading, following the earnings announcement. Sun's stock had fallen 8.29 percent to $3.54 at the time of this report. ®

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