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Sun reveals storage division performance

The company reveals for the first time its storage division's financial performance. Its storage product revenue declined slower in recent years than did revenue from servers.

Sun Microsystems has revealed for the first time the financial performance of its storage division, showing in a financial statement that revenue from those products declined slower in recent years than did revenue from servers.

Sun's revenue dramatically declined when the manic spending of the Internet boom years ended in 2000, but storage revenue shrank slightly less than its most significant product line--servers. In fiscal 2000, storage products accounted for $2.4 billion, or 18 percent of the company's $13.4 billion total product revenue. In fiscal 2002, the $1.7 billion in storage revenue was 19 percent of the $9.1 billion total product revenue, according to a quarterly reported filed Wednesday with the U.S. Securities and Exchange Commission.

Sun has struggled over the years to capture more storage revenue from rivals such as EMC, acquiring a series of companies and signing a deal under which it sells Hitachi Data Systems' high-end product line.

Sun didn't break out details of its software revenue, a segment that's received more prominence with Sun's Orion plan to simplify software licensing by bundling numerous packages together. Spokesman Andy Lark said the company maintains its position that software is an inextricable part of hardware: "Software makes it work. It's not of much value with out the software."

Sun also said it's in negotiations to settle previously disclosed charges brought by the U.S. Department of Commerce that Sun violated export regulations--charges that could mean monetary penalties and suspension of the company's export license. The initial charges alleged that Sun illegally sold equipment to Egypt in 1998 and to a Hong Kong reseller that sold equipment to China in 1999. But on April 16, the Commerce Department added 19 more charges to the list, the filing said.

Under the proposed settlement, Sun would pay a monetary fine and would have its export privileges under close scrutiny for one year. If during that year there are export rule violations, Sun would have its export privileges revoked, which could affect Sun's business materially. "We continue to believe we are reasonably likely to reach a negotiated resolution," Sun said in the filing.

In addition, Sun reported the effects that reporting stock-option compensation as an expense would have had on its most recent quarter. In April, Sun reported $4 million in net income, but the stock-option expense would have cut $138 million. Factoring in tax effects would have resulted in a net loss of $128 million for the quarter.

"We don't agree with expensing of stock options," Lark said.

Sun also disclosed the costs of several recent acquisitions. Its July 2002 purchase of Afara Websystems, key to Sun's advanced "chip multithreading" microprocessor plans, cost $28 million in stock. Sun's acquisition of Terraspring in November 2002, a crucial part of Sun's N1 advanced data center management plan, cost $30 million in cash. And Sun's September 2002 acquisition of Pirus Networks, which now has become the centerpiece of the storage portion of N1, cost $167 million in stock.