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Sun shifts focus to greater profitability

Storage and software company declares turnaround and sets new goals after years of financial troubles.

SAN FRANCISCO--Sun Microsystems executives, boosted by a solidly profitable quarter, said Tuesday the company has turned around its financial troubles and raised expectations for the company's future performance.

"We've now turned the corner," said Chief Financial Officer Mike Lehman at a conference here for financial and industry analysts. "We are thrilled with where we are."

The server and software company, which spent years in the red after the dot-com bust, now has a deadline for an ambitious financial goal: Lehman expects an operating margin of 10 percent in fiscal 2009, which ends in June 2009. Operating margin--a measure of financial health consisting of operating profits as a percentage of revenue--determines how much money a company generates for cash reserves, dividends or other purposes.

Sun's recovering financial results have convinced some that the turnaround is real.

"Right now the financial results are in their favor, so they can afford to say, 'Things are looking up, and we're on the offensive,'" said Tony Iams, an Ideas International analyst. Although Sun still must sustain its results, "I would say they have turned around," he said.

There are worse problems a company can have, but some financial analysts now are expecting even more.

"As Sun demonstrates progress toward its 10 percent target over several quarters, we believe the question will shift to why the company cannot achieve mid-teens operating margins," said Merrill Lynch analyst Richard Farmer in a research note on Monday. That goal is plausible for a company with sustained revenue growth and with gross margins--a measure of profitability--exceeding 45 percent, Farmer said.

Lehman said morale is improving along with financial results.

"Inside the company, the energy is different," Lehman said. "Our employees feel good about what they're doing. They're proud to say where they work again. For a while that wasn't the case."

And they can rest easier about whether they might lose jobs in yet another layoff at the Santa Clara, Calif.-based company. "We don't see a need for an event like last year--a big restructuring," Lehman said.

Sun is shifting from restoring its reputation among earlier customers and fans to enlisting new allies, said Chief Executive Jonathan Schwartz. "Now it's all about going after new customers," he said.

A key part of that effort takes place at the edges of Sun's product lines: for example, Sun servers running others' operating systems or Sun's Solaris operating system running others' operating systems on others' servers.

"As we meet customers at the edges, we do our best to bring them into the center of Sun," where profit margins are higher, Schwartz said.

The company will happily sell products to customers who view information technology as a necessary expense, but Sun is focusing its research and development on technology customers for whom technology is a way to get ahead.

"The market is dividing into those who see IT as a competitive weapon and those who see IT as a cost center," Schwartz said. And Sun now has the full product line needed to court customers who fit the former model, Schwartz said.

"We are now fully outfitted to pursue 100 percent of the market," Schwartz said. "There is no opportunity we are precluded from bidding on, there is no customer we can't serve."