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Analysts look for profit from Sun

Sun on Thursday is expected to reiterate its outlook for its fourth quarter to analysts hungry for good news. But that's now: What will the outlook mean for the future?

Analysts are hoping that new products from Sun Microsystems will translate into bigger profits in the future.

Sun is expected to reiterate its outlook for its fourth quarter on Thursday. Executives are expected to predict a slight profit, said analysts. Sun's outlook comes a day after the company announced a new version of its Solaris operating system and plans for a bevy of new products.

In a research note, Robertson Stephens analyst Eric Rothdeutsch said the quarter "appears to be trending as expected," but noted that Sun will rely on quarter-end sales to hit its targets.

According to First Call, Sun is expected to report a profit of a penny a share on sales of $3.33 billion for the quarter ending June 30.

Analysts said Sun sales appear to be solid in industries related to health care and the Department of Defense, but other areas such as telecommunications remain weak.

Based on analysts' channel checks, most Sun observers said they think demand for the company's enterprise server hardware stabilized in the quarter with demand picking up for storage and high-end servers.

Even though Sun's fourth-quarter outlook may relieve Wall Street a bit, many analysts were busy Thursday handicapping what Sun's new product cycle will mean for profits in the future.

For some analysts, Sun's release of Solaris 9 on Wednesday sent a message that its research and development culture is alive, which may indicate that revenue growth will eventually follow. Sun is also laying groundwork to introduce a new product strategy called "N1" to manage computing processes in data centers and effectively bypass rivals such as Hewlett-Packard, IBM and Computer Associates International.

Brent Bracelin, an analyst at Pacific Crest, said that Wednesday's debut of Solaris 9, along with other products in the last six months, should help Sun when information technology spending rebounds, which arguably may not happen until 2003.

Nevertheless, Bracelin said "engineering efforts in 2002 will be instrumental in helping to reposition Sun for a recovery."

Specifically, Bracelin said Solaris 9, along with Sun's SunFire line and SunOne Network Identity products, will help fuel a new product cycle.

"While Street sentiment has focused largely on Sun's negatives, we believe the company is well-positioned for a profit recovery based on a new product cycle, the growing need to replace the installed base of aging UNIX/mainframe back-office systems, new consulting partners and tight operating controls," said Bracelin.

Other analysts weren't so sure. SG Cowen analyst Richard Chu said he was keeping a cautious view of the company. Chu said it was too early to predict a Sun rebound.

He said Sun faces a lot of competition from the likes of IBM, Microsoft, Hewlett-Packard and Dell Computer. Linux is also "something of a Pandora's box for Sun," he said.

Meanwhile analysts said the jury is still out on how Sun will handle its recent executive turnover. Chief Operating Officer Ed Zander recently retired to join other Sun executives heading for the exit.

Add it all up and Sun still faces question marks about whether it can return to its heyday. "We expect a strong rebound in time, but average growth rates over the next several years are more likely to be in the low to mid-teens, rather than much higher," said Chu.