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Strong sales spur Sun earnings

The popularity of new products including desktop systems, servers, storage, and software products propelled its quarterly earnings, Sun Microsystems reports.

Sun Microsystems (SUNW) today reported earnings that far surpassed analysts' expectations for flat quarterly numbers, thanks in part to strong desktop sales.

Strong sales of new products, including desktop systems, servers, storage, and software products propelled earnings, the company said. The report coincided with the Inside Sun Software gathering held today at the company's Menlo Park, California, headquarters (see related story).

The company's stock lost half a point in trading today, from yesterday's close of 29-7/8. Sun reported after the markets closed.

Sun reported net income of $223.5 million, or 58 cents a share, up from $143.3 million, or 37 cents a share.

Wall Street expected the workstation vendor to report 47 cents a share, according to First Call. That is only 1 cent higher than last quarter, when Sun reported a 41 percent jump in profits.

Analysts say Sun's current level of gross margins is not sustainable since server and enterprise hardware vendors are being affected by a decline in gross margins for hardware. Still, Sun's long-term outlook is positive, they say.

"Sun's downward margin pressures are by nonhardware revenue sources such as the Java license, semiconductor design sales, and software. As these elements increase as a percent of Sun's revenues, gross margins could rise over time," a Smith Barney report said.

Third-quarter earnings included a 4 cent-per-share non-recurring, acquisition-related charge attributed to acquiring LongView Technologies. They also included an 11 cent-per-share gain for the sale of an equity investment during the quarter. Without these items, third-quarter earnings were 51 cents per share.

Revenue for the quarter was $2.1 million, up from $1.8 million for the third quarter last year. Revenue was also up from the $2 billion reported in the previous quarter.

A recent Salomon Brothers report said that Sun's server segment remains strong, fueled by its Starfire, UltraSparc, and high-end server business. The low-end workstations, however, remain under pressure from NT-based systems, as do those of other Unix vendors.

"The combination of Java, the Internet-intranet, and the new Starfire Unix system is getting Sun reps into executives offices where they have never called on before," the report added.

IDC Research expects traditional workstation vendors like Sun to continue to enjoy solid market share numbers in the midrange technical applications markets, but says the growth of those markets will be "flat." In this market sector, the report says, the wide number of applications available for Unix will benefit Sun and Silicon Graphics in particular as they hold onto their Unix-only strategy.