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Sun, Gateway expected to report earnings growth

Despite an inhospitable environment on Wall Street, both companies are expected to report higher earnings, fueling the debate over the direction of the market and technology demand.

Despite an inhospitable environment on Wall Street, Sun Microsystems and Gateway are expected to report higher earnings today.

Sun, a leader in sales of high-end computing hardware for Web sites and data centers, is expected to report earnings of 23 cents per share for its third fiscal quarter, according to consensus estimates on First Call/Thompson Financial. This would represent a 28 percent increase over earnings of 18 cents per share for the same period last year.

Meanwhile, Gateway, which primarily sells computers to consumers and others at the opposite end of the demand spectrum, is expected to post earnings of 41 cents a share, a 32 percent rise over earnings of 31 cents for the same quarter last year.

The earnings reports from the two companies likely will become fodder for debate over the direction of the market and technology demand. Stocks plunged earlier this week when an analyst predicted slower-than-expected growth for Microsoft. Yesterday, however, Advanced Micro Devices far exceeded expectations and predicted PC growth in the high teens for the year. Seagate beat estimates, while Rambus met them. Technology stocks have crept up this morning.

Both reports will likely provide evidence for both sides of the argument. Despite annual increases in earnings, Gateway's sales will likely come in below earlier expectations because of lower-than-expected sales to corporations. Some of the growth in profit also comes from sales of "beyond-the-box" items such as ISP accounts, which carry higher margins. Non-PC sales will likely account for 25 percent of operating profit, according to Richard Gardner of Salomon Smith Barney.

Overall, revenues are expected to decline in the second quarter. The open question is whether increased "beyond-the-box" sales going forward will make up the difference for lagging business sales. Many analysts believe Gateway may see a slight dip in the second quarter and recover in the second half. Gardner, among others, said he will be waiting to hear what management says on the conference call.

Sun is facing formidable competition from IBM, Compaq and Hewlett-Packard in its core business, the sale of Unix servers that handle the heavy lifting of corporate computing tasks and are in demand for Internet companies. Still, despite worries about delays in upcoming high-end products, analysts aren't concerned about Sun's prospects.

Some analysts laud Sun's emphasis on a single operating system, Solaris, tightly integrated with its own UltraSparc chips. The product line is easier to manage than the complex array offered by IBM, HP and Compaq, each of which has a minimum of three major server designs.

Sun also hasn't had to worry about backing Windows NT operating system, which has made inroads only into relatively low-end servers. However, Merrill Lynch analyst Steve Milunovich believes the successor, Windows 2000, could become a problem for Sun in 2001 or 2002.

"Sun's momentum, positioning in fast-growing dot-coms and Solaris strength, should see the company through several months of competition from HP and IBM," Morgan Stanley Dean Witter analyst Thomas Kraemer said in a report this week.

Analysts are worried in part about whether Sun can keep up with demand for its products, an issue that could extend Sun's continuing backlog problems. "Demand remains so strong that Sun should again build backlog in the current quarter and add to this backlog" in its next quarter, Kraemer said.