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Sun Reports Narrowing of Quarterly Loss

The company is buoyed by a legal settlement with Microsoft but says demand for its data center servers and storage systems failed to live up to projections.

April 15, 2005|From Bloomberg News

Sun Microsystems Inc., the world's No. 3 maker of servers that run corporate networks, reported a narrower fiscal third-quarter loss Thursday, buoyed by proceeds of a legal settlement with Microsoft Corp.

The loss was $9 million, or break-even on a per-share basis, compared with a loss of $760 million, or 23 cents a share, a year earlier, when the company had expenses for job cuts. Sales fell to $2.63 billion from $2.65 billion, Santa Clara, Calif.-based Sun said. The results missed analysts' estimates and the company's shares dropped.

Revenue from the unit that makes servers and other computers, Sun's biggest group, fell to $1.68 billion from $1.71 billion. Sales fell short because of lower-than-expected demand for Sun's data center servers, or the biggest machines, and storage systems, Chief Financial Officer Stephen McGowan said during a conference call with reporters. The company also struggled in the U.S., he said.

"I'm not pleased with it at all, but I'm hoping we can get this turned around," McGowan said.

Chief Executive Scott McNealy is trying to stem a two-year decline in Sun's market share by increasing sales of services because they are more predictable than sales of hardware such as server computers.

"It confirms our suspicions that they face a very tough competitive environment," said Ted Moore, an analyst at National City Wealth Management in Cleveland, which manages $26 billion. "Sun's advantage used to be superior innovation, but that's not nearly the advantage it once was."

Sun reported results before IBM Corp., the world's second-largest software maker, said its profit and sales fell short of analysts' estimates. IBM released its earnings earlier than planned and its shares tumbled.

Shares of Sun, down 27% this year, fell 18 cents to $3.78 in extended trading Thursday. They earlier fell 6 cents to $3.96 on Nasdaq.

Sun's loss before the $54-million gain from Microsoft, $92 million in tax benefits and costs for job cuts, was 2 cents, missing the break-even average estimate of 21 analysts surveyed by Thomson First Call. Analysts had expected sales for the third quarter ended March 27 of $2.74 billion. Sun typically doesn't provide a forecast.

"We had a huge improvement to get to break-even and it's a nice step forward," McNealy said. "All of this is moving in the right direction, but we have a lot more to do."

Sun, which had losses in all but four of the last 16 quarters, is trying to find new ways to sell hardware and services. In February, the company introduced a program to sell computing power online for $1 an hour, compared with as much as $16 it said traditional customers spent on computing. Companies that buy excess computing will be able to resell it on the online exchange of Archipelago Holdings Inc.

Sun's share of server revenue fell to 9.6% in the final three months of 2004, about half what it was in 2000, according to market researcher Gartner Inc.

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