Sun Microsystems Sees 1Q Profit

Once one of Silicon Valley's most bellicose technology companies, Sun Microsystems Inc. struck new alliances during the first quarter with two of its fiercest former foes, Microsoft Corp. and IBM Corp.

The server and software maker's uncharacteristic moves were part of a wrenching turnaround strategy that has now helped propel Sun past an important milestone.

With stronger sales and improved cost controls helping the Santa Clara-based company post a profit in its fiscal first quarter, it has completed its first full year in the black since the dot-com meltdown.

Net income for the July-September period was $89 million, or 3 cents per share, the same figure expected by analysts surveyed by Thomson Financial. A year ago, Sun lost $56 million, or 2 cents per share.

Sales were lower than Wall Street expected, however.

Were it not for $113 million in restructuring costs, Sun's profit would have been 3 cents per share higher during the latest quarter, the company said Monday.

Bolstered by the partnerships with Microsoft (Sun will install the Windows operating system directly onto some of its servers) and with IBM (Sun's Solaris operating system will run on some IBM machines), and pleased at the pace of restructuring, management raised its profit guidance for the current fiscal year.

Sun now expects gross profit margin -- the profit on every dollar of revenue after the cost of making the products is stripped out -- of 44 percent to 47 percent in 2008, above the company's previous estimates. The first-quarter gross profit margin --48.5 percent, compared with 43.5 percent last year -- was higher than expected.

Sales are expected to grow by percentages in the low- to mid-single digits.

"We're thrilled with the progress we're making," Chief Executive Jonathan Schwartz said in an interview. "The turnaround has not only taken hold, it's now in full stride."

The optimism, however, wasn't enough to overcome Wall Street's disappointment with Sun's sales for the quarter, which at $3.22 billion were 1 percent higher than last year but still short of the $3.27 billion analysts were expecting.

Shares fell 7 cents at the open of trading Tuesday to $5.64. They had risen 11 cents to $5.71 in regular trading Monday.

Sun, which makes servers that handle a variety of corporate computing tasks and software such as Solaris and Java technology, is battling back from losing more than $5 billion since the dot-com bust. Since turning the corner on profitability a year ago, the company has pocketed more than $600 million in earnings.

The profitable streak coincides with sweeping cost-cutting undertaken by Schwartz after he took the CEO reins from co-founder Scott McNealy in April 2006.

Sun has cut about 4,000 jobs through layoffs and attrition since June 2006 and announced another round of job cuts in August. Sun has not specified how many jobs will be cut in the latest restructuring.

Sun is reaching out to former adversaries to broaden the appeal of its products. Once a vocal antagonist of its larger rivals, Sun hopes the partnerships with Microsoft and IBM -- both favorite targets of McNealy's verbal jabs when he was CEO --announced during the latest quarter will help sell more servers and rake in more service subscriptions.

Sun also hopes a bit of fancy financial footwork will help woo new customers spooked by the company's slumping stock price, which has been stuck below $10 since 2002.

Sun wants shareholders to approve a 1-for-4 reverse stock split -- essentially a cosmetic move to boost the stock price fourfold by converting every four of Sun's shares to one while keeping the company's market value of about $20 billion the same. The maneuver will go to a vote at Sun's annual meeting with stockholders Thursday.

Sun commands 13 percent of the worldwide server market, trailing IBM with 31 percent and Hewlett-Packard Co. with 28 percent, according to market research firm IDC.


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