January 24, 2006 1:55 PM PST

Sun revenue up, but loss widens

Sun Microsystems acquisitions helped lift revenue 17 percent to $3.337 billion for the most recent quarter, but the company on Tuesday reported a net loss that increased to $223 million.

Sun lost $223 million, or 7 cents per share, compared with net income of $4 million, or 0 cents per share, a year earlier. Excluding several one-time items, the loss would have been 3 cents per share, Sun said.

The server and software company missed expectations for revenue. Analysts surveyed by First Call expected $3.488 billion, $151 million more than Sun reported. Sun's revenue was 17 percent larger than the $2.841 billion from the year-earlier quarter, before Sun's acquisitions of StorageTek and SeeBeyond.

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During a conference call on Tuesday, Sun CEO Scott McNealy explains how the UltraSPARC IV+ processor's popularity has exceeded expectations.
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In a characteristically optimistic statement, Chief Executive Scott McNealy touted new customer orders and pending shipments. "The backlog is the highest in years, and this increase in bookings and demand is driving improved business fundamentals," he said.

Outgoing Chief Financial Officer Steve McGowan pointed to the company's gross margin, a measure of profitability, which increased 0.4 percentage points to 42.6 percent.

After years of largely declining revenue, Sun is counting on two new server lines to restore its fortunes and reverse market share losses. The "Galaxy" line uses Advanced Micro Devices' Opteron processor, an x86 chip Sun formerly shunned, and the Niagara.

Sun also is pushing software, making its Solaris operating system an open-source project, promising more open-source software to come, and selling its Java Enterprise System server software on the basis of the number of employees in a company rather than the number of processors in a server.

In Sun's conference call, McGowan expressed pleasure with the orders customers placed. "These trends indicate solid customer acceptance for recently introduced products," he said. However, part of that backlog was because Sun couldn't keep up with orders, he said.

Computer systems revenue was $1.438 billion, a decrease of 5 percent that came because of unfavorable exchange rates and "an inability to fulfill UltraSaprc IV+ demand," McGowan said.

The problem stemmed from Sun forecasts, McNealy said. "We just underestimated how attractive and popular the UltraSparc IV product line would be. We shipped above our plan," he said. Texas Instruments, which builds the chip for Sun, "is executing well to our orders. We just didn't order enough, so the lead times are high" and customers must wait for products.

About 75 percent of Sun's revenue comes from low-end systems, McGowan said, but servers with UltraSparc IV+ are helping address the relative weakness in more powerful systems, McNealy said.

"This chip has put us on par or ahead of the game. For the first time in awhile we've leapfrogged the competition in the midrange and high-end markets," McNealy said.

Analysts on the conference call focused on whether Sun's new Niagara-based T1000 and T2000 servers would cannibalize sales of existing products. McNealy and President Jonathan Schwartz focused their answers on external sales targets, chiefly Intel-based servers running Linux and Hewlett-Packard's Unix servers.

"Most of the cannibalization of our low-end Sparc (servers) has been done," McNealy said. "We're pre-cannibalized."

Added McNealy, "There was a low barrier to exit to Solaris over the last five years to Linux. Customers were able to move smoothly without hardly breaking a sweat," McNealy said. "The barrier to exit from Linux back to Solaris 10 is even lower than the original barrier from Solaris."

Sun closely watches measurements of product shipments. For servers, shipments dropped 6 percent compared with the year earlier, but x86 servers grew 93 percent to about 20,000 units. Java Enterprise System subscriptions increased by 148 million sequentially to a cumulative total of 1.105 million.

Sun missed one of its key goals for the quarter, however: In cash flow from operations, the company spent $191 million rather than increasing its cash balance.

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What about SUNW?
With Sun sinking its teeth into the low-end server market and gaining ground I see this boosting shareholder confidence. All tho I have worked for Sun in the past I don't see the SUNW share going past 10.00 ever. The company has to many problems with tracking orders and getting a hold of re-salers or Sun Sales Reps. This company in my book is a huge failure and I wouldn't plan on buying a SUNW stock until they can prove value to your portfolio.
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