Schwartz ends first year at Sun with quarterly profit

The company reports net income of $67 million, but misses its revenue goal for the quarter because of server sales slowdown.

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Sun Microsystems posted its second consecutive quarter of profit on Tuesday, but revenue was hurt by a slowdown in server sales in the final weeks of Jonathan Schwartz's first year as chief executive.

The server and software company posted net income of $67 million for the quarter ended April 1, a significant improvement over the $217 million loss a year earlier. Revenue increased 3 percent to $3.28 billion, but that was a notch less than the expectations of Sun itself and of analysts surveyed by Thomson First Call, who predicted $3.42 billion.

"As we hinted (in the previous quarter), we expected the quarter would be challenging, and in fact it was," Schwartz said in a conference call. The company blamed the problem on customers holding back purchases until the release of Sun's new M-class servers jointly developed with Fujitsu.

"We ended up a couple percentage points short of our plan," principally because of weakness in server and storage system sales in the last few weeks of the quarter, said Chief Financial Officer Mike Lehman. "It appears part of that was (customer) anticipation of higher-performance products announced by Sun and Fujitsu. It appears not that we're losing business to competitors."

Sun is maintaining its goal of 4 percent operating margin--a measure of financial health consisting of operating profits as a percentage of revenue--for the current quarter, which runs through June. Strong performance at the end of 2006 has helped boost the company's stock price, though it dropped 35 cents, or 6 percent, to $5.59 in after-hours trading Tuesday.

Sun has had some success boosting services revenue in recent years, but its software and storage system sales haven't shown much progress. Its recent financial improvements have come in its bread-and-butter business: selling servers.

Schwartz took over as Sun CEO a year ago, rising through the ranks from the software side of the Santa Clara, Calif.-based company's business with a two-year stint as chief operating officer.

He's brought some of his software ways to Sun's hardware business, said Redmonk analyst Stephen O'Grady, pointing to Sun's try-and-buy program that lets customers try Sun severs free for 60 days and its open-source UltraSparc T1 "Niagara" chip design called OpenSparc.

And Schwartz has clarified Sun's market stance, fully embracing open-source software and servers using x86 processors. "The comment I heard from a sizeable (Sun customer) is, 'At least I know what the plan is. You know they're going open, you know they're committed to x86,'" O'Grady said.

In its most recent quarter, Sun's Niagara system sales were over $125 million, about the same as in earlier quarters, the company said. "We want to see that growing as we go forward," Schwartz said.

There are plenty of new Sun hardware options on the horizon.

Newly arriving are Sun's M-class systems, which employ Sparc64 VI processors and high-reliability mainframe technology from Fujitsu and Sun's Solaris operating system. They largely replace Sun's own servers with its UltraSparc IV+ processor, which has done unexpectedly well in recent quarters.

Also in June, Sun will release its "Constellation" blade server, which will accommodate blade servers with Niagara processors as well as x86 chips from Advanced Micro Devices and Intel, Schwartz said. It's one of several Intel-based servers the company is introducing alongside its existing AMD systems.

Sun also wants to sell servers not just a rack or blade server chassis at a time, but a data center at a time. To expedite the process, it's begun what it calls Project Blackbox to sell entire shipping containers full of servers ready to operate. The company sold its first model, Schwartz said, to the Stanford Linear Acclerator, which will use its Blackbox for high-performance computing

Next, Schwartz said, will come Niagara 2 in the third quarter of 2007--the first quarter of Sun's fiscal 2008. And its new "Rock" chip, a high-end 16-core cousin to the eight-core Niagara and Niagara 2, will arrive in the second half of 2008.