April 14, 2000 2:30 PM PDT

Sun beats estimates with record quarter

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Shares in Sun Microsystems couldn't rise much above the rest of the ailing Nasdaq technology herd today, despite a strong earnings report.

Sun beat Wall Street expectations yesterday, posting a net profit of 26 cents per share for its third quarter, excluding non-recurring costs. Analysts expected Sun to earn 23 cents per share, according to First Call.

Last year for the same period, Sun posted earnings of 18 cents a share. Net income grew 49 percent from $292 million last year to $436 million this year.

The company had record revenue of $4 billion, a 37 percent increase over the $2.9 billion it took in last year.

Sun shares briefly soared this morning on the Nasdaq exchange, climbing more than $6 to $84, before being beaten back down by another resoundingly gloomy day on Wall Street. They closed regular trading at $78, up a mere 25 cents.

Sun faces increasingly stiff competition from IBM, Compaq Computer and Hewlett-Packard in its core business, the sale of Unix servers that handle the heavy lifting of corporate computing tasks and are in demand for Internet companies. But despite worries about delays in upcoming high-end products, analysts generally aren't concerned about Sun's prospects.

The company showed little in the way of modesty about its third quarter, which ended March 26. "This was without a doubt a blowout quarter," chief financial officer Mike Lehman said, adding that in the six years he's been CFO, "I cannot recall any single quarter that was as satisfying as this one."

Sun chief operating officer Ed Zander attributed the strong quarter to demand for hardware to build the Internet, solid sales with large companies, strong support of Sun hardware by software companies, and a strong sales force in the field.

Although Sun's loud "dot-com" marketing campaign may have raised the company's profile, start-up customers haven't boosted revenues much so far. "It's still a relatively small part of our business," Zander said.

Sun is closely watched as a bellwether of tech trends. "Sun frequently comes up on other computer makers' radar screens as the company to beat," Goldman Sachs analyst Laura Conigliaro said in a report this week.

But Sun is having no trouble with competition, Lehman said in a conference call yesterday following the earnings announcement. "Our overall product set is very competitive, and we expect it to remain so going forward," he said.

"Our business accelerated during the so-called Year 2000 lockdown," when many were concerned computer sales would slow, and Sun continues to gain market share, chief executive Scott McNealy said in a statement.

The amount of products and services that customers ordered from Sun grew 41 percent compared with the previous year, Sun said.

The current quarter "is shaping up to be a very strong quarter already, based on our backlog and orders generated," Lehman said. In the longer term, Sun expects revenue growth of at least 25 percent, he said.

Sun vigorously defended the schedule for debuting next-generation "Serengeti" computers based on its upcoming UltraSparc III "Cheetah" chips. "There is no change to the schedule since the last quarterly update. The architecture and chips are solid," Zander said.

In the long term, McNealy said Sun will make money from products and services for connecting everything to the Internet--cars, gaming consoles, light bulbs and factory robots.

Zander said that in the next two months, Sun will augment its storage products--long a sore spot as Sun tries to wrestle business away from EMC. Coming products include a storage server appliance that analysts expect to compete with products from Network Appliance, products to fit better into networks with a variety of computer types, and pretested configurations of storage area network products.

The Sun-Netscape Alliance--a joint e-commerce software effort with America Online and Sun--has won customers at Vodafone, Nortel, Xerox, Onebox and Citibank, Zander said. The alliance has had some growing pains from executive turnover and the difficulties of meshing two product lines.

Sun's love-hate relationship with Linux continues. Linux computers have been nibbling at Sun's low-end product line, Zander said, noting that Sun has dropped prices on its low-end E250 and E450 servers.

Linux is an operating system based on Unix and embraced by all the major server companies except Sun. Sun prefers its own Solaris operating system but argues that Linux will draw programmers toward the Unix camp and away from Microsoft products.

Sun boasted of being ahead of competitors. "We are beating IBM with their S80s right and left," Zander said, referring to IBM's new top-end Unix server. Sun hasn't had a stronger quarter against Hewlett-Packard. And regarding Compaq, "The entire sales force seems to have disappeared" for high-end equipment, Zander said.

 

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