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Selloff casts shadow over Sun

Sun's stock drops 10.9 percent from yesterday's close as investors grab profits.

Shares of Sun Microsystems (SUNW) today traded as low as 62-3/8, dropping 10.9 percent from yesterday's close as investors grabbed profits, company executives suggested.

Sun, which released its quarterly results after the market's close yesterday, had reached a 52-week high to close at 70 per share, up 1-5/8 of a point. But the stock fell in after-hours trading, despite the fact that the earnings slightly exceeded analysts' estimates.

Sun CEO Scott McNealy speculated that investors who watched the stock rise in recent days sold their shares after the quarterly results were released.

Sun reported net earnings of $123.4 million, or 63 cents a share, for the quarter ending September 29, compared with $84.7 million, or 42 cents per share, before the split a year ago. The 45 percent earnings jump was attributed to improvements in the company's server business and the overall boom in Java popularity.

Revenues, meanwhile, jumped to $1.86 billion, up more than 25 percent from $1.48 billion a year ago. Wall Street had estimated that Sun would report earnings of 61 cents, according to First Call, a collection of analyst estimates.

In a conference call, McNealy and CFO Michael Lehman emphasized that the company posted one of its best first quarters, usually its slowest season. McNealy believes that customers are increasingly turning to network-based computing and its Java software programming language.

"This was the highest level of operating income we've ever had for a first quarter," Lehman added. Operating income in relation to net revenues was 9.5 percent during the first quarter, compared with 7.6 percent a year ago.

Analysts applauded Sun's performance. "I sense business with their servers has been strong through the quarter," said George Elling, an analyst with Merrill Lynch. "New products like their Ultra servers are in demand, and although they have a lot of competition, they have a lot of new major products that have done exceptionally well."

Doug Van Dorsten, an analyst with Hambrecht & Quist, said Sun has also been helped by problems their competitors have encountered with their respective servers.

Silicon Graphics last month announced a glitch with the microprocessor chips in its R10000 workstations and has introduced virtually an entire replacement for its product line, Van Dorsten said. Hewlett-Packard, meanwhile, touted the speed of one of its workstations, but the company has since said the chip must be fine-tuned for certain software applications.