July 22, 1999 7:05 PM PDT

Sun reports record profits

Sun Microsystems reported record profits for its fiscal fourth quarter, topping analyst expectations by two cents.

The Palo Alto, California, computing giant, which has been pushing aggressively to associate its name with the Internet, turned in a net profit of 48 cents per share. Financial analysts surveyed by First Call expected revenues of 46 cents per share.

Sun had revenues of $3.5 billion, a 22 percent increase over the same quarter last year. Net income increased to $395 million from $288 million over the same period.

The company also closed its fiscal year in record territory. Revenues were $11.7 billion, with net income of $1.2 billion.

Despite such growth, Sun has been working to refine its business. The company is trying to build the Internet into more of its operations, including interactions with customers and suppliers.

"We have to 'dot-com' our company," chief executive McNealy said in a conference call, referring to the widespread success of Internet start-ups. "We see tons of low-hanging watermelon opportunities."

Sun's revenue grew 32 percent in the United States and 25 percent in Japan and nearby markets, the company said. "We believe these growth rates are quite compelling and indicate we are gaining share from our principal competitors," Hewlett-Packard and IBM, chief financial officer Michael Lehman said during the call.

SGI, HP, and IBM all have reported good financial results this quarter, but "We are growing substantially faster than these companies," added chief operating officer Ed Zander.

Still, the company's growth isn't likely to exceed 25 percent, McNealy said. When a company grows that fast, it opens itself to the "bozo invasion," the addition of inferior employees, he said.

Sun got a black eye from recent outages at online auction site eBay, whose site runs on Sun equipment. McNealy said that as a result of such issues and the fast growth rate experienced by many Internet companies, Sun will take a more active role in making sure customers know how to make sure their systems work correctly.

"We've got to go out and be a little more proactive with our customers and do some audits and some grading and some more aggressive communication. We can't just sit there and consult. We might have to go grab the tiller a little bit," McNealy said.

To encourage this trend, Sun managerial bonuses are tied to how well the systems under their control stay up and running.

At the high end of its product line, Sun now has 1,300 Enterprise 10000 servers installed, and companies are buying servers with larger numbers of processors and storage capacity, the company said.

At the low end, Sun earned increasing revenues from its Ultra 5 and Ultra 10 workstation line, the company said. In addition, the company bumped SGI aside for workstations at Ford.

Sun also has new "thin clients" in the works, Zander said, acknowledging that the first batch of computer terminals dependent on a server wasn't good enough. "We haven't given up on thin clients," he said.

Sun has prototypes of its new UltraSparc III chip, Zander added, putting the new chip a step ahead of Intel's Merced. Texas Instruments will build the chips, and Sun expects the new chip to debut at 600 MHz in computers in the first half of the year 2000.

Sun has been hiring chiefly in the services area, although services such as technical support and choosing the right Sun equipment come with lower profit margins than Sun's traditional products business, Lehman said. In the last quarter, Sun hired 700 services employees.

Most of Sun's 7,500 services employees work on technical support, but about 1,200 of them handle "professional services" such as designing networks and helping customers pick the right Sun products for the job, Lehman said.

 

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