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Sun expects weaker 4Q
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May 29, 2001: 6:10 p.m. ET
Company further reduces targets; sees weak sales, flat margins
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Sun Microsystems confirmed some analysts' fears Tuesday, warning that its fiscal fourth-quarter financial results will fall short of its already lowered expectations.
The company, a leading supplier of network servers, said it expects to log earnings per share ranging between 2 cents and 4 cents per share on sales ranging between $3.8 billion and $4 billion.
When Sun reported its fiscal third-quarter results on April 19, executives ratcheted down their financial targets, saying they expected fourth-quarter earnings, excluding extraordinary charges, to be "flat to slightly down" from the 8 cents per share they reported in the third quarter. At that time, they had forecast sales slightly above the third quarter's $4.1 billion.
Prior to that, analysts polled by earnings tracker First Call had generally expected Sun to log a profit of 10 cents per share on roughly $5.3 billion in sales during the quarter, which ends June 30.
The most recent consensus estimate of analysts was for Sun to earn 6 cents per share in the fourth quarter, with individual estimates ranging from a high of 9 cents per share to a low of 3 cents per share.
Including one-time charges, Michael E. Lehman, Sun's chief financial officer, said the company anticipates it will break even on an earnings per share basis.
Shares of Sun (SUNW: down $2.04 to $16.63, Research, Estimates) were the most actively traded on Nasdaq on Tuesday, falling 8.8 percent to $18.67 ahead of the earnings warning, which was released after the close of trading. They fell another $1.26 to $17.41 in extended hours trade.
Earlier Tuesday, Goldman Sachs analyst Laura Conigliaro sounded a word of caution about Sun, cutting her earnings estimates for the company's upcoming fiscal year and warning that it could miss its reduced estimates for the current quarter.
In a teleconference with analysts Tuesday evening, Lehman pinned the blame for the shortfall primarily on weaker-than-expected demand in Europe.
"The demand in Europe has really trailed off more than what we thought about six or seven weeks ago," he said.
He said demand also had deteriorated to some extent in the Asia-Pacific region, and sales remained sluggish in the United States. However, he said the slowdown in the U.S. appears to have stabilized.
Sun is the top supplier of mid-priced Unix servers – so named for the operating system they run – and is a leading supplier of high-end workstations.
As have most companies in the data-networking sector, Sun's business has been hurt by a slowdown in capital spending, especially among telecommunications and Internet service providers in the U.S. who, faced with a slowing and uncertain economy, have either deferred or cancelled many of their new equipment orders.
Lehman said the slowdown in Europe appears to be following the same pattern as the one in the U.S., with telecommunications and Internet service providers cutting back the most.
At the same time, Sun has been facing increasing competition in the market for mid-range servers -- with IBM (IBM: down $2.27 to $113.00, Research, Estimates) and Hewlett-Packard (HWP: down $1.02 to $29.19, Research, Estimates) substantially stepping up their efforts with aggressively priced systems -- as well as a difficult product transition.
In March, the company introduced its newest servers, called Sun Fire, which are built around its hotly-anticipated and oft-delayed UltraSparc III microprocessors and run the latest version of Sun's Unix operating system.
Lehman insisted that the pricing environment in the first part of the fourth quarter was similar to what it has seen recently.
"I wouldn't characterize it as dramatically different than what we said last quarter," he said. "It's a pretty tough environment out there. Everybody's being competitive, but not more so this quarter."
Lehman said Sun's fourth-quarter gross margin, which refers to the percentage of sales remaining after subtracting product costs, should remain flat with the 41.3 percent it reported in the third quarter. Previously, the company had expected gross margins to improve during the quarter.
He would not provide a forecast for the fiscal first-quarter or the coming fiscal year. Executives are expected to provide those details when they report fourth-quarter results on July 19. 
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