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Sun trims loss despite weaker server sales

Acquisitions boost bottom line

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Sun Microsystems continued to suffer from waning product sales during its first quarter but did manage to trim its net loss. Executives blamed the recent introduction of new Opteron-based servers for part of the sales slump, saying key customers put off purchases to evaluate the new gear.

Sun posted first quarter revenue of $2.76bn - a rise over the $2.68bn reported in the same period last year. The results, however, were boosted by sales from recently acquired SeeBeyond and StorageTek. StorageTek and SeeBeyond contributed $226m to revenue in the period.

Sun's net loss for the quarter came in at $123m, which compares to a net loss of $133m last year. The results from the most recent quarter include a $50m charge related to stock option expensing.

The company reported cash flow from operations of $224m in the quarter, leaving it with $4.53bn in cash.

Sun blamed weak spending by financial services, communications and government customers for a 6 per cent year-over-year drop in server and storage revenue (excluding StorageTek). This fall proves especially painful given that Sun has tried to zero in on courting financial services and government sales. Management insisted that the slowdown may be a result of customers waiting to buy the new Opteron-based servers.

"There is some indication that Wall Street customers may have delayed purchasing decisions in Q1," said Sun's CFO Steve McGowan.

Analysts weren't convinced by this line of reasoning and went after Sun's top executives for not producing better numbers. In particular, they questioned why Sun has failed to ship servers for the lucrative, growing blade market.

One analyst also challenged Sun's boast that its new line of Niagara processors would arrive sooner than expected. CEO Scott McNealy said the chips will appear "this quarter" instead of the first quarter of 2006, and Sun's PR staff have sent reporters an invitation for a "major processor announcement" on Nov. 14. Sanford C. Bernstein & Co. analyst Toni Sacconaghi noted that Sun notoriously announces products as available before they're actually shipping in volume, and asked if this would be the case with the Niagara-based servers. McNealy declined to provide more specific guidance.

Sun is under as much pressure as ever to improve its sales as evidenced during a recent shareholder meeting where investors decried a more than three-year slump. ®

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