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Sun Micro Swings to a Loss

A restructuring charge offsets a 17% rise in revenue.

Updated from 4:32 p.m. EST

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

delivered a familiar refrain after the bell Tuesday, promising that the good times are right around the corner.

"We're on plan from an execution perspective, both on cost and revenue synergies," said CEO and chairman Scott McNealy.

"The big takeaway here is a resurgence of demand as evidenced by the strong bookings and blacklog growth," McNealy said.

But while McNealy and the other top brass at Sun were pointing to the bright future, many analysts and investors were still trying to sift through the details of another disappointing quarter. The company swung to a loss in its fiscal second quarter, posting a loss of $223 million, or 7 cents a share, vs. the $19 million profit the company earned at this time a year earlier.

Although sales in the quarter were up 17% year-over-year at $3.34 billion, the growth was driven by the company's recent acquisitions of StorageTek and Seebeyond. And even with the benefit of the acquisitions, the top line was still shy of the $3.48 billion expected by analysts polled by Thomson First Call.

Following the announcement, shares of Sun slipped 5 cents in after-hours trading to $4.32 on Instinet.

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Sun's loss included a 4 cent-a-share charge related to accounting adjustments for the recent acquisitions and a 2-cent-a-share charge for stock-option expensing. Excluding these charges, Sun's loss was in line with the penny-a-share loss expected by the Street.

Sales in Sun's core business of computer systems were down 5% year-over-year to $1.44 billion. Revenue from services was up 23% year-over-year, while data management revenue doubled to $670 million.

Gross margin for the quarter was 42.6%, down sequentially from the 44.1% level in the first quarter, but up 0.4 percentage points from a year ago. And the company ended the quarter with about $4.28 billion in cash and marketable debt securities.

According to Sun executives, the success of its recently introduced Niagara-processors as well as its Opteron-based Galaxy servers, has pushed up computer bookings to the highest level in years. In fact, company officials said Sun had underestimated demand for some of its products, pushing times out slightly.

"We are definitely seeing an uptick in demand," said President and COO Jonathan Schwartz.

Total backlog for the company's products and services grew to $1.6 billion, while the book-to-bill ratio -- a key measure of future revenue -- moved up to 1.11, compared to 0.97 in the first quarter.

But when pressed by analysts during a conference call about whether this backlog would result in a higher-than-seasonal March quarter, McNealy was non-committal.

"Anecdotally, the business center is full, the pipelines are solid and there's a lot of positive activity," McNealy said. But he maintained that he wasn't in a position to "speculate" about how that would impact financial results, noting that the company had to translate the positive buzz into revenue.

As is the company's custom, Sun did not provide much guidance for the current quarter other than to say that spending on R&D and SG&A would be flat sequentially, at about $1.6 billion, while capital expenses will be about $150 million in the third quarter. The company said it expects positive cash flow for the full year 2006.

Analysts are expecting the company to lose 3 cents a share in the current quarter on revenue of $3.2 billion.