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Sun back in black--for now

The computing giant returns to profitability in its final quarter, but expects to see red ink in the next. It also appoints a new head for its global sales unit.

Sun Microsystems returned to profitability in its most recent quarter and named a new top sales executive, but the server maker expects to slip back into the red in the current quarter.

The Santa Clara, Calif.-based company posted net income of $20 million on revenue of $3.4 billion for the final quarter of a grim fiscal 2002 that ended June 30. Revenue fell 14 percent from $4 billion from the year-ago quarter, but grew 10 percent from $3.1 billion in the third quarter.

Sun shares dropped $1.27, or 22 percent, to $4.54 in midday trading Friday.

Sun expects its overall fiscal 2003 to be profitable, with revenue growth of about 10 percent to 15 percent over 2002's $12.5 billion.

Sun continued its overhaul of its top-level executive ranks, naming Robert Youngjohns, 50, to replace Masood Jabbar, 52, as executive vice president of global sales. Youngjohns had led sales in Europe, the Middle East and Africa.

Sun reported net income of 1 cent per share, both including and excluding various one-time charges. That level met the expectations of analysts surveyed by First Call, but the $3.4 billion revenue slightly exceeded the $3.3 billion consensus expectation.

But Sun's revenue typically drops from the last quarter of its fiscal year to the first quarter of its next, a pattern that Sun's new Chief Financial Officer Steve McGowan said likely will continue.

"Our initial outlook for the first quarter is a slight loss," McGowan said in a conference call.

Sun employees achieved the profitability goal "while protecting investments in research and development, aggressively managing cash balances, and gaining market share from competitors," Sun Chief Executive Scott McNealy said in a statement.

Sun slipped into unprofitability four quarters ago but fulfilled its predicted return to profitability through expense controls, through revenue growth of 20 percent in the United States compared with the third quarter, and through sales of a newer storage line.

Sun announced in October 2001 it would cut 3,900 positions and then in April said another 1,000 would be eliminated, partly through attrition.

Climbing back into business
Sun's quarterly revenue peaked at about $5 billion back when corporations and Internet companies eagerly spent on costly Unix servers. But Sun has struggled as those sales eroded while IBM and HP invigorated efforts to steal Sun customers, pushing the company into the red.

Profit margins were lowered by "list-price reductions, competitive discounting and sales promotions," McGowan said. But the continuing price pressure on Sun was somewhat offset by an increase in software profit margins resulting from the end of the Sun-Netscape Alliance, under which Sun had to split some server software revenue with AOL Time Warner.

The economy remains difficult as well. "We are not counting on an economic recovery in our forecasting for fiscal 2003," McGowan said in a conference call with reporters.

But McNealy remained characteristically brash while discussing the quarter. Eroding profit margins, which dropped farther than Sanford Bernstein analyst Toni Sacconaghi expected, indicate "the desperation of our competition," McNealy said. "We crushed IBM, we crushed HP in the March quarter."

Sun is succeeding at expanding from its traditional customer base, chiefly financial services and telecommunications companies, but also to a lesser degree education and manufacturing.

"Over half our revenue is now coming from our nontraditional businesses," McGowan said, pointing to in retail, health care and life sciences.

The company highlighted new customers, including Aetna and Cigna, Brigham and Women's Hospital in Boston, OfficeMax and Best Buy. In storage, Sun beat out EMC to win a 36-terabyte account at Eastman Kodak and another with General Electric Transportation Systems.

Sun is on the brink of jumping into the market for servers running the Linux operating system, a significant departure for a company that has boasted of the simplicity of having a single operating system. Likely timing for the move is at the LinuxWorld Conference and Expo in August, at which McNealy will deliver the keynote address.

Sun also is preparing to overhaul its servers with faster 1.05GHz UltraSparc III processors, with 1.2GHz to follow. The 1.05GHz chips will be shipped in a deal to sell 10 top-end Sun Fire 15K servers to the Cambridge-Cranfield High Performance Computing Facility.

Jabbar's retirement from the sales operation is effective immediately. "I've logged over a million miles in two years, and I'm going to sit back and rest a little," he said during a conference call.

Youngjohns has worked closely with Jabbar and the executive change will be smooth, Sun promised. "I'm extremely confident of a straightforward transition," Youngjohns said.

Jabbar took over as top salesman two years ago, just as the Internet mania was collapsing. His top priority was increasing revenue when he took the job, Jabbar said, but that changed as IBM's attack on the Unix market gained traction.

"Six months into the job, that (priority) changed to market share," Jabbar said.