Sun meets estimates

July 19, 2001: 5:44 p.m. ET

Enterprise hardware maker's 4Q results are in line with expectations

NEW YORK (CNNfn) - Sun Microsystems on Thursday logged fiscal fourth-quarter financial results that were on the high end of the company's lowered expectations, but executives said they won't provide specific financial targets for the current quarter until the end of August.

However, the company said it does expect to at least break even on an operating basis in the current quarter.

After the close of trading, Sun said it earned $134 million, or 4 cents per share, during its fiscal fourth quarter ended June 30. That's a sharp decline from a profit of 20 cents per share during the same quarter a year ago, but is on the high end of the expectations executives set in May, when they reduced estimates.

At $4 billion, Sun's fiscal fourth-quarter revenue fell 20 percent from the same quarter last year.

In late May, Sun (SUNW: Research, Estimates) executives lowered their financial targets, saying they were aiming for a profit ranging between 2 cents and 4 cents per share on sales ranging between $3.8 billion and $4 billion.

The company had begun the quarter anticipating fourth-quarter earnings "flat to slightly down" from the 8 cents per share it reported in the third quarter on sales slightly above the third quarter's $4.1 billion.

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 United States who, faced with a slowing and uncertain economy, have either deferred or cancelled many of their new equipment orders.

Sun also has been facing increased competition in the market for mid-range servers, with IBM, substantially stepping up their efforts with aggressively priced systems. When IBM revealed its latest quarterly results on Wednesday, executives reported a decline in sales of mid-range servers.

Although executives at Sun in Palo Alto, Calif., put the best face on the latest quarter's results, claiming that they continued to wrest market share from its key competitors and highlighting several new products, they would not provide a specific financial forecast for the current quarter.

"At this point in time, we don't plan on forecasting a revenue range for Q1," Michael E. Lehman, Sun's chief financial officer, told analysts during a teleconference Thursday evening.

He said the company would provide financial estimates during its mid-quarter update, which will be in the last week of August.

"Our planning for Q1 does have us above the pro forma breakeven point," which is $3.7 billion in revenue, Lehman said.

"How we do in the remainder of the year will largely be driven by overall factors affecting [information technology] spending. Most of those factors are largely outside of our direct control," Lehman added.

Analysts most recently had expected Sun to log a fiscal first-quarter profit of 5 cents per share on $4.3 billion in revenue, according to a survey conducted by earnings tracker First Call.

Lehman said the company is seeing signs indicating that the second half of its fiscal year, which just started, "could show significant improvement over what we have been experiencing recently."

Among these are the Federal Reserve's interest rate reductions, the effects of which Lehman said usually are not felt for six months after they are made. He also said the company at that time will have a full line of new servers, built around its hotly-anticipated and oft-delayed UltraSparc III processors, shipping in volume, putting the company in a much stronger competitive position.

In addition to the growing competitive threats in its core market, Sun has been wrangling with a difficult product transition. In March, the company introduced its newest servers, called Sun Fire, which are the first UltraSparc III-based systems and run the latest version of Sun's Unix operating system.

During the call, Ed Zander, Sun's president and chief operating officer, said the company has overcome all the difficulties it had experienced with the switch to UltraSparc III.

"The UltraSparc III transition is behind us," Zander said.

Suns' fourth-quarter gross margin, which refers to the percentage of sales remaining after subtracting product costs, was 41.5 percent. When Sun warned of the weaker results in May, executives said they expected the fourth-quarter gross margin to 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.

For the full fiscal year, Sun reported a profit of 42 cents per share, compared with 55 cents per share in the prior year. Fiscal year revenue totaled $18.3 billion, up from $15.7 billion in the prior year.

Shares of Sun (SUNW: up $0.45 to $14.44, Research, Estimates) rose 45 cents to $14.44 on the New York Stock Exchange ahead of the earnings news Thursday.