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Sun beats estimates by a penny

The company posts earnings of 67 cents per share on revenues of $2.8 billion, $400 million more than year-ago period, and says it expects to announce a stock split in April.

Sun Microsystems beat analysts' expectations by a penny today, posting second-quarter earnings of 67 cents per share.

Financial analysts expected the company to report earnings of 66 cents per share, according to a 20-broker consensus compiled by First Call. That's an increase over the 57 cents a share Sun reported for the same quarter the year before. The earnings announcement excluded acquisition-related charges.

Sun further said it expects to declare a 2-for-1 stock split on April 8, pending shareholder approval, according to chief financial officer Mike Lehman.

Sun reported revenues of $2.8 billion for the quarter ending December 27, 1998, $400 million more than the same period a year ago. Net income for the quarter rose from $223 million in 1997 to $272 million this quarter.

"It was a strong quarter. We're well-positioned to take advantage of growth in the industry," said Sun Chief Operating Officer Ed Zander. Executives pointed to strong sales, weak competition, and "torrid growth" in Sun's professional services business as reasons for the success.

Stock in the Palo Alto, California, company has climbed from about $40 per share in October to its current price above $100. Sun Microsystems is dealing from a position of strength as it continues its advocacy of centralized servers, Internet technologies, and networked everything.

Sun Chief Executive Scott McNealy said Sun's destiny is in its own hands because of delays in Microsoft's Windows 2000 and Intel's upcoming 64-bit Merced and McKinley chips.

"We won't see ported, tuned applications on Merced or McKinley for a couple years," and then companies will be dealing with the "W2K problem:" the arrival of Windows 2000, McNealy said in a conference call today. "We've got a lot of open-field running here. We've got to execute like crazy."

Sun executives said they expected revenue the next two quarters to "accelerate," but cautioned analysts that those revenue increases are already factored into analysts' predictions.

Sun's "dot-com" marketing campaign is now bearing fruit, Zander said, pointing to customer wins with Siemens, Nasdaq, Egghead, Saab, McDonald's, Sharper Image, PacBell, and others. In addition, Sun's acquisition of NetDynamics resulted in "great wins" with Chevron and Boeing, Zander said.

Sun was worried going into the last quarter because of uncertainties posed by the change to a new Sun-based enterprise resource planning computer system called "Sun Peak" for ordering, manufacturing, accounting, and other company-wide tasks, Lehman said. The quarter was a "nail-biter...one of the most difficult quarters we have had in terms of operational challenges," Lehman said.

Sun's business the last quarter was helped by strong sales in Europe, executives said. In addition, sales in Japan rose for the second quarter in a row. "We're moving in the right direction, but I don't want to get too overly optimistic," Zander said.

In addition, Sun has given away more than 70,000 copies of Solaris 7, Sun's version of Unix, and most of those copies went to Intel architecture users, McNealy said. As a result, Sun expects more Intel/Solaris software to arrive in the next six to 12 months.

McNealy had effusive praise for Linux, the freely distributed Unix-like operating system. The operating system is popular on low-end servers, desktops, and portables, he said, "a space where Solaris isn't super-strong." And because Linux and Unix are similar, it's easy to move software from one system to the other.

"If they were cousins, they wouldn't be allowed to marry," quipped McNealy.

Curiously, Microsoft executives have made the opposite argument about Linux, saying that Linux draws users already fond of Unix away from Sun.

"The prospects have not looked as good as this in a long time, if ever," said Laura Conigliaro, an analyst with Goldman Sachs.

Sun is good at generating a vision for computing, she said, "but this time, they not only understood the correct vision, but they were able to exploit it pretty well."

Conigliaro pointed to Sun's success with high-powered enterprise servers. "It's increasingly obvious that data and computing has become increasingly centralized. Sun was there with a large system to take advantage of the fact," she said.

Philip Rueppel of BT Alex. Brown offered a similarly rosy description of the Palo Alto, California, company.

"The performance of the stock has been just phenomenal over the last three months as investors realize the fundamental position that Sun is in vis-a-vis the infrastructure of the Internet," Rueppel said.