January 16, 2003 3:34 PM PST

Sun charges lead to $2.3 billion loss

update Server maker Sun Microsystems reported a net loss for its most recent quarter of $2.28 billion Thursday, most of it a $2.13 billion noncash charge relating to the reduced value of acquired companies.

Excluding the goodwill impairment charge and several other one-time expenses, the Santa Clara, Calif.-based company would have reported $10 million in net income for the quarter, ended Dec. 31, compared with a $99 million net loss in the year-ago quarter. Revenue decreased 6 percent to $2.9 billion, from $3.1 billion a year ago.

The company had warned in September of a possible goodwill impairment charge of as much as $2.2 billion. Including the charges, Sun reported a loss of 72 cents per share; excluding them, the company broke even.

The breakeven per-share result is 2 cents better than what analysts polled by First Call had forecast. The $2.9 billion in revenue matched the expectation.

Sun, a stock market darling in the 1990s, has been grappling with increased competition, decreased demand and deeper price cuts in its sales of higher-end computers. To return to profitability, the company has been cutting expenses, an effort that has included a 4,400-employee layoff that began in the fall.

The stock market drop has taken its toll on acquiring companies. AOL Time Warner thus far has seen the biggest charge, $54 billion.

About $1.6 billion of Sun's goodwill impairment charge was from the acquisition of Cobalt Networks, which cost Sun $2 billion in stock in 2000, with a further $363 million resulting from Sun's HighGround buyout in 2001, which originally cost $400 million in stock.

In addition to the goodwill impairment charge, Sun recorded a $357 million restructuring charge; an $11 million expense for loss of investments; a $4 million expense for research and development; and a $204 million tax benefit related to the charges.

Sun didn't offer projections for coming quarters, other than cautioning analysts to expect increasing tax and pay raise expenses. Further muddying the crystal ball, the company announced that it is ceasing midquarter financial updates because it's too hard to predict results in an uncertain economy.

Sun's top-end and high-volume servers did well in the quarter, said Chief Strategy Officer Mark Toliver. At the high end, Sun Fire 12k and 15k servers "showed strong growth" compared with the previous year and the previous quarter, he said, while shipments for the newer four-processor v480 server "ramped very strongly."

The company's gross margin--an important measure of profitability--increased from 41.2 percent in the previous quarter to 43.3 percent in the December quarter. While discounted pricing to fend off competitors cut gross margin by 1 percent, that decrease was more than offset by a 3 percent increase resulting from lower component costs and the sales of profitable products, Chief Financial Officer Steve McGowen said.

Operating expenses were cut $52 million, about $14 million of which was because of the layoffs, McGowen said. About 3,100 have been cut so far, with the rest to lose their jobs by the end of June.

Sun garnered $141 million in cash from operations, increasing its cash and marketable securities by $30 million, to $5.3 billion.

Sun has had "33 straight quarters...of positive cash flow from operations," Chief Executive Scott McNealy boasted on a conference call. "Cash is king."

 

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