Sun posts one penny profit in Q2, as revenue falls

Another disappointment

Sun Microsystems managed to eke out a profit in its second quarter but failed to impress analysts or investors with a drop in product sales.

Sun reported second quarter revenue of $2.84bn - a disappointing total given that it's a 1.6 per cent fall from the $2.89bn reported one year earlier. Sun did, however, post a profit of $19m or 1 cent per share, which compares favorably against last year's net loss of $125m or a loss of 4 cents per share. Analysts had, on average, been looking for Sun to pull in $2.92bn in revenue and to post earnings per share of 1 cent.

"It feels good to ring up a modest . . . profit," said Scott McNealy, chairman and CEO at Sun.

On the plus side, Sun increased its gross margin percentage by 0.5 percentage points to 42.3 per cent. It also generated $52m in cash during the quarter, leaving it with $7.5bn in the bank.

Sun's product revenues, however, were less than stellar. It shipped $1.8bn worth of hardware and software during the second quarter. This compares to sales of $1.9bn in the same period last year. Sun's services revenue did increase this quarter hitting $1bn. Last year, Sun posted $944m in services revenue.

Sun's shares quickly fell by about 6 per cent in after-hours trading, as investors reacted to the quarterly report.

Sun noted that it suffered from an unusually slow quarter in the US - a sentiment echoed by Intel, which also reported earnings earlier this week. Telcos and government customers pulled back on their spending, according to Sun, but financial services customers remained strong.

"Our effort to take back Wall Street is paying off," McNealy said.

Sun's sales of one processor to eight processor servers were solid, but it failed to move as much high-end kit as it would like. The company hopes this trend will change as some of its larger customers pick up Solairs 10, which starts shipping at the end of this month.

"We hope that will drive a nice upgrade cycle in the midrange to high-end servers," McNealy said.

Financial analysts battered Sun during a conference call with the company's management. Sun executives revealed that the company expects to post a loss next quarter due in large part to $250m in charges related to restructuring and a settlement with the IRS (Internal Revenue Service).

Sun's rare profits have largely come as a result cost-cutting measures such as layoffs and better inventory management not from increased revenue.

"We are not done with cost reductions," McNealy urged. "You may think it's done but nobody here thinks it's done."

"The discussion with the customer today is very different than one year ago, two years ago or three years ago," he continued. "Three years ago there was no discussion . . . We see the differences . . . We feel the differences." ®

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