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Sun shares climb on positive earnings report

The server giant's shares climb more than 8 percent in early trading after vaulting over analyst estimates for its most recent quarter with record revenue of $5 billion.

Sun Microsystems shares climbed more than 6 percent today, after the computing giant vaulted over analyst estimates for its most recent quarter with record revenue of $5 billion.

The revenue figures released yesterday represent a growth of 42 percent over the same quarter last year when revenue passed $3.5 billion.

The company's net income for the quarter grew 67 percent to $660 million, or 39 cents per share, well over the 33 cents estimated by analysts polled by First Call/Thomson Financial.

A year ago, the company had split-adjusted earnings of 24 cents per share, with net income of $395 million.

Sun shares had climbed $5.94 to $104 at the close of regular trading today, a 6.1 percent increase. Shares reached as high as $106.25 early in the session.

"I think the numbers are breathtaking," said SG Cowen analyst Richard Chu. Other analysts called it "superlative," "unbelievable" and "stunning."

Strong server growth led the company. Sun shipped more than 100,000 servers in the quarter, including 500 top-end E10000 "Starfire" servers that typically cost more than $1 million, chief operating officer Ed Zander said. That's about a fifth of the total 2,500 that have sold over the history of the product.

Ed Zander Sun chief executive Scott McNealy gloated over the numbers. "In every important metric, including market share gains, we had an incredible quarter," he said in a statement.

Pointing to Sun's vision for the future, he added, "Our belief is that everything with a digital or electronic heartbeat will one day be connected to the Internet and often to Sun servers."

Chief financial officer Mike Lehman said Sun saw growth in "virtually all the important markets, including telecommunications, financial services, retail and manufacturing."

And there's more to come. For the current fiscal year, Sun upped its projections for annual revenue growth, moving from the previous advice of growth in the "strong 25 percent" range to "pushing 30," Lehman said in a conference call today. "Compared to our view three months ago, we are raising our expectations for the current fiscal year," he said.

Joseph Galli Indeed, the growth itself is a problem, raising the specter of customers with unfulfilled orders who could cancel and buy from a competitor. Sun has instituted an internal goal of improving its own forecasting, Zander said. "We had no idea coming into the quarter we were going to have those kinds of numbers," Zander said. "We don't want to leave anything to our competition."

Lehman said in an interview Sun's order backlog at the end of the quarter was $1.8 billion.

Including two special items--a $95.8 million gain from the sale of equity investments and a $3.1 million charge related to the acquisition of Innosoft--the company's net income was $720 million, or 42 cents per share, the company said.

Sun, the top Unix server seller, still faces challenges as rivals race to duplicate Sun's success. Hewlett-Packard and IBM, the No. 2 and 3 Unix server sellers, are a particular threat, while EMC continues to have little trouble selling storage systems that attach to all those companies' servers.

"HP and IBM have narrowed if not eliminated Sun's product lead," Merrill Lynch analyst Steve Milunovich said in a recent research report. IBM shares surged today on profits of $1.9 billion with revenues of $21.7 billion for its most recent quarter.

Sun's software business also picked up. Its standalone products, such as storage management software and its iPlanet e-commerce line, accounted for revenue of about $1 billion, Zander said.

Sun is still hiring storage-focused salespeople, Lehman said, but Zander declined to say whether storage revenue growth outpaced the company average. The company beat out EMC in bids at Kmart's site and Applied Materials, Zander said.

IBM's top-end S80 Condor Unix server performs better than Sun's aging E10000 Starfire machine, and Big Blue is spending millions to take on Sun. HP, meanwhile, is set to unveil its 64-processor Superdome server in November.

By contrast, Sun's high-end E10000 replacement, using its new but delayed UltraSparc III Cheetah chip, isn't due until January, according to a source familiar with the company's schedule. Lower-end UltraSparc III machines are expected in October, and a CPU speed advance for the E10000 is expected later this month.

UltraSparc III systems are at beta testing sites and the Sun is focused on making sure all the software works. "It's down to test, test, test," Zander said.

UltraSparc III chips will debut at 750 MHz and 900 MHz, Zander said, and the company has begun to build models with copper technology that will run at speeds greater than a 1 GHz.

But Sun, which coined the marketing jingle "the network is the computer" years before the Internet was a big deal, has the advantage of being the top dog. Major software companies such as Oracle and SAP eagerly make sure their programs run on Sun machines, application service providers have been snapping up Sun's servers, and Microsoft's dominance on desktop computers no longer troubles computer analysts.

"Sun's partners are the cream of the crop," Goldman Sachs analyst Laura Conigliaro said in a report yesterday. "With demand for the company's products far greater than supply and continuing to accelerate, Sun has the option of cherry-picking key customers and partners."