Sun sees profits slide

Sun acquisitions helped lift revenue 17 percent to $3.337bn (£1.869bn) for the most recent quarter, but the company on Tuesday reported a net loss that increased to $223m.

Sun lost $223m, or 7 cents per share, compared with net income of $4m, 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 $3.488bn, $151m more than Sun reported. Sun's revenue was 17 percent larger than the $2.841bn from the same time last year, before Sun's acquisitions of StorageTek and SeeBeyond.

In a characteristically optimistic statement Scott McNealy, Sun's chief executive, 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 AMD's 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 $1.438bn, a decrease of 5 percent that came because of unfavourable exchange rates and "an inability to fulfil UltraSparc 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 a while 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 cannibalise sales of existing products. McNealy and Jonathan Schwartz, Sun's president, focused their answers on external sales targets, chiefly Intel-based servers running Linux and HP's Unix servers.

"Most of the cannibalisation of our low-end Sparc [servers] has been done," McNealy said. "We're pre-cannibalised."

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 148m sequentially to a cumulative total of 1.105m.

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