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Sun tops earnings estimates by 2 cents

The computer maker beats Wall Street expectations, reporting net income of 33 cents per share for its first quarter of fiscal 2000.

Computer maker Sun Microsystems topped Wall Street expectations by 2 cents today, reporting net income of 33 cents per share for its first quarter of fiscal 2000.

Analysts surveyed by First Call expected Sun to have a net income of 31 cents per share. In the same quarter last year, Sun's net income was 25 cents per share.

Revenue for the quarter, which ended September 26, was $3.1 billion, while net income was $271 million, excluding charges from its acquisition of Star Division.

Sun also said its acquisition of Star Division, a company that provides Sun with a suite of office software similar to Microsoft Office, cost $3.5 million. In addition, the transaction meant Sun had to pay an additional $1.3 million in income taxes.

Sun's bread and butter comes from sales of its server computer line, which Sun has successfully associated with the rise of the Internet. But analysts say competitors are breathing down Sun's neck.

"Sun continues to gain market share, in part due to strong server performance," said Merrill Lynch analyst Steve Milunovich in a statement today.

Sun's top-of-the-line Starfire server, though, is losing luster. "Starfire's edge is fading," Milunovich said. "Sun's Internet aura will be needed to fend off more aggressive rivals IBM and HP" until models with Sun's upcoming Ultrasparc III chip arrive next year, he said.

HP's servers work well, analysts say, but the company has had problems selling them, it warned earlier this month. HP's N-class server "has proven disappointing, despite great specs," Milunovich said.

One big issue for Sun is the backlog of unfulfilled orders, Sun CFO Mike Lehman said in a conference call today. That backlog grew by $125 million to $950 million in the quarter, he said.

"While a large backlog can be comforting, it is higher than we would like," Lehman said. "We expect to bring the backlog down a bit" in the current quarter, he said.

The Taiwan earthquake, which sent shock waves across the computing industry, left Sun unscathed, he said. "We do not expect a significant impact from the Taiwan earthquake, though we are seeing a slight increase in memory costs," Lehman said.

Sun won't follow Hewlett-Packard's lead in giving away hardware to companies that provide Internet services in exchange for a fraction of their revenues, chief executive Scott McNealy said.

"I have been talking to service provider after service provider, and they are not appreciative of computer companies that want to get into the service provider market," a move that would be like an airplane manufacturer getting started to compete with airlines.

Unlike HP, Intel, and Microsoft--Sun won't compete with its own customers. "We're going to stay building airplanes, not become an airline. We're going to grow food, we're not going to be a grocery (store)," McNealy said.

Sun's revenue for the current quarter will be more than 20 percent greater than the same quarter a year ago, Lehman said. But part of that strong growth will result from increased shipments that come from filling its backlog of orders.