Sun Micro Also Rises

Shares hit a 52-week high in heavy trading.
Publish date:

Updated from Oct. 26.

Sun Microsystems

(SUNW) - Get Report

jumped 3.5% Friday after narrowing its loss in its fiscal first quarter.

The Santa Clara, Calif., company said sales in the three months ended Oct.1 totaled $3.19 billion, up 17% from the year before and in line with Wall Street expectations.

Sun beat analysts' estimates on the bottom line, however, posting a loss of $56 million, or 2 cents a share, vs. the $123 million, or loss of 4 cents a share, it posted a year ago. Excluding certain stock compensation expenses and restructuring charges, Sun said it had a penny loss in its most recently ended quarter.

The average analyst expectation called for Sun to lose as much as 4 cents a share during the first quarter, including stock compensation expenses.

Shares of Sun rose 19 cents early Friday to $5.55 after earlier hitting a 52-week high at $5.61.

"It feels great to continue growing," CEO Jonathan Schwartz said in a postearnings conference call with analysts, describing the company's current product line as the most competitive in Sun's history.

After several years of licking its wounds following the dot-com bust, Sun is taking steps to put itself back on a growth track. In April, Schwartz

replaced founder Scott McNealy as chief executive, and announced a plan to cut costs and

reduce staff by up to 5,000 shortly thereafter.

Even before the management change, Sun was overhauling its product line, offering servers based on popular

Advanced Micro Devices

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microprocessors, as well as a line of servers featuring Sun's new Niagara chip.

Sun says its game plan now hinges on enticing companies that develop mass-market, Web-based services to use its software tools, such as Java and the Solaris operating system, and subsequently sell them on Sun's hardware.

Schwartz said the plan was bearing fruit and credited Sun's broad mix of products and services for its growth.

According to Sun, computer systems revenue rose 15% year over year to $1.47 billion. Sales of the new Niagara-based servers exceeded $100 million for the second consecutive quarter.

Storage revenue increased 15% from a year ago, thanks to Sun's acquisition of



Total downloads of the Solaris operating system surpassed the 6-million mark during its first quarter, according to Schwartz, with many of the Solaris downloads destined for machines from


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In the past year, Sun has turned Solaris into open source software and made it freely available in hopes of broadening its use beyond Sun's own hardware.

Sun's software revenue increased 17% year over year, said Schwartz, although he would not provide a dollar figure for the revenue and offered only scant details on how Sun was making money from its free operating system.

He said that the company was exploring breaking the software business out as an individual operating segment in future earnings reports in order to provide more information.

As in the previous quarter, Sun offered guidance that struck some analysts as overly conservative.

Sun said it expected sales to increase sequentially by "high-single digits" in the fiscal second quarter under way. Assuming 9% revenue growth, Sun would have sales of $3.47 billion, slightly below the average analyst expectation of $3.52 billion.

CFO Mike Lehman said the company was being prudent in order to give itself flexibility to make any necessary pricing moves and still achieve its profit-margin goals.

"I wouldn't take any particular comment that we make about revenue growth or how we're planning the business model as at all indicative of the market opportunity," said Lehman.

Lehman said that Sun cost restructuring is proceeding according to plan, and the company remains on track to achieve at least 4% operating margins in the fourth quarter, and better than 10% operating margins in the long term.

Sun reduced its staff by 2,000 workers in the first quarter and expects to cut an additional 1,000 to 2,000 jobs by the end of the year.

Gross margins in the fiscal first quarter were 43.5%, down about half a percentage point from the 44% level a year ago. Lehman pegged gross margins between 42% and 44% in the current quarter.

Analysts expect Sun to break even in its second quarter.

Schwartz also raised the possibility that Sun might use


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server processors, which he said look "strong" again, in its volume servers at some point, supplementing Sun's current AMD-only lineup.

"We've seen a lot of customers running on Intel," said Schwartz. "How we may include Intel in our future product line is really up to the future, so stay tuned on that."