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Sun hit by weak hardware spending

update The company reports a loss in the third quarter, whereas it profited in the same quarter a year ago. But it still expects to reach profitability in the current quarter.

update Sun Microsystems posted a loss in the third quarter, citing weakness in hardware spending, but the company still expects to hit a profit in the fourth quarter.

The company posted a net loss of $37 million, or 1 cent a share, for its fiscal third quarter, compared with a profit of $136 million, or 4 cents a share, in the same quarter last year.

Third-quarter revenue came in at $3.1 billion, flat from the previous quarter, but nearly a 25 percent drop from the same quarter last year, when the company reported revenue of $4 billion.

Excluding special charges, Sun reported a third-quarter pro forma loss of $26 million, or 1 cent a share, narrowing its loss by 67 percent from the previous quarter.

Sun's performance was slightly better than the pro forma loss of 2 cents per share that analysts had expected, but it fell a little short of revenue expectations of $3.19 billion, according to the First Call consensus.

Sun, which faces fierce competition from a spate of new Unix server offerings from competitors like IBM and Hewlett-Packard, previously said in its midquarter update that it had two targets: increase third-quarter revenue slightly from the previous quarter and achieve profitability in the fourth quarter.

"While revenues came in on the lower end of the range of our outlook...clearly there has not been any improvement in the overall IT spending environment," said Sun Chief Financial Officer Michael Lehman. "We have made some significant progress in our stated goal of being profitable in the fourth quarter."

Sun improved its gross profit margins quarter to quarter by cutting costs associated with product transitions and by lowering inventory levels, Lehman said.

Revenue got a boost from sales of the company's top-end Sun Fire 15K "Starcat" server system, which had "strong sales," and the low-end UltraSparc III V880 systems, Lehman said.

Sun is positioning the Starcat as a replacement for IBM mainframes and for groups of lesser servers that require more administrators, while the V880 competes with Wintel servers, which are loaded with the Windows operating system and Intel chips.

For the fourth quarter, Sun says it expects to turn a profit as well as see a slight improvement in revenue over the previous quarter, Lehman said. The company also expects to cut 1,000 positions by December, primarily through attrition and some layoffs. The cuts represent less than 3 percent of the company's 39,500 employees.

"At the end of the day, we are gaining customers, we're gaining share and we're gaining account penetration," said Chief Operating Officer Ed Zander.