Sun Returns to Black After Years of Red

Wall Street has welcomed Sun Microsystems Inc. back in the black, but investors are questioning whether the notoriously boom-and-bust company can remain profitable for the long term.

For the three months ended Dec. 31, the server and software maker earned $126 million, or 3 cents per share, up from a net loss of $223 million, or 7 cents per share, in the year-ago period.

Fiscal second-quarter revenue totaled $3.57 billion, up 7 percent from $3.34 billion a year earlier.

Excluding special expenses, such as $58 million in stock-based compensation charges and $26 million in restructuring costs, Sun earned $148 million, or 4 cents per share.

On that basis, which does not comply with generally accepted accounting principles, analysts surveyed by Thomson Financial expected the company to earn $26.4 million, or 1 cent per share, on sales of $3.52 billion.

Sun shares gained 47 cents, or 8.3 percent, in after-hours trading Tuesday. Before the report came out, shares dropped 9 cents to close at $5.66 on the Nasdaq Stock Market.

Although some analysts say Sun could post an annual profit, critics said the second quarter could be a blip -- similar to the second quarter of fiscal 2005. That's when Sun earned 1 cent per share, and executives predicted a comeback. Losses returned the following quarter.

"This could be a turnaround quarter, and I wouldn't discard the company, but I am not happy with everything they're doing and I don't want to speak too prematurely," said Rick Munarriz, senior analyst for media and technology investing at The Motley Fool. "Is that a light at the end of the tunnel or an incoming train?"

As usual, Sun did not provide earnings guidance for upcoming quarters.

Sun Chief Financial Officer Michael Lehman acknowledged Tuesday that quarterly revenue in the United States and revenue from the storage division were weaker than he would have liked. He also said the diminished value of the U.S. Dollar -- particularly relative to Asian currencies -- artificially boosted net income by 1 cent per share.

Lehman said the current quarter would be "challenging" but emphasized that financial results in the second quarter exceeded even the most bullish internal estimates.

"We have a lot of opportunities in front of us and are focused on taking full advantage of momentum we've created," Lehman said.

Sun slashed about 1,600 positions last quarter and now employs about 34,600 workers. It could shed as many as 4,000 in the fiscal year.

The earnings report follows years of losses -- more than $5 billion since 2002 -- for Santa Clara-based Sun, one of the highest-flying companies during the 1990s Internet boom.

Sun, which competes against Hewlett-Packard Corp., IBM Corp. and Dell Inc., is known for catering to corporate clients willing to spend liberally on cutting-edge technology. The high-end strategy was lucrative when other companies were healthy -- but when the economy soured in 2000, expensive computer servers and advanced technology were seen as discretionary, even profligate.

In fiscal 2006, Sun seemed to turn a corner, with revenue up 18 percent from the previous year -- confirmation that the company's cost-cutting measures and overall business strategy was paying off, executives said.

Last week, Sun went public with an ambitious initiative to get startups to buy Sun's Solaris operating system instead of Linux -- widely considered the low-cost choice for penny-pinching entrepreneurs. The campaign focuses in part on getting computer programmers in developing countries to contribute to the Solaris code, on the assumption that they'll get executives to buy equipment with Sun's operating system.

On Monday, Sun announced it would begin shipping servers and workstations later this year that run on processors by Intel Corp. In return, Intel officially endorsed Sun's Solaris operating system. The partnership is likely to boost Sun's market share.

On Tuesday, Sun privately placed $700 million of convertible senior notes with KKR Private Equity Investors, the publicly traded fund of private-equity firm Kohlberg Kravis Roberts & Co. Schwartz said Sun, which has $2.6 billion in cash, would use proceeds to acquire other companies.

"We certainly don't need the money," Jonathan Schwartz, Sun's chief executive, retorted in a conference call. "It's an opportunistic transaction."


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