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Sun beats by a cent; revenue down

Server maker Sun Microsystems beats analyst expectations by 1 cent, but revenue drops 20 percent and net income drops 81 percent.

Server maker Sun Microsystems beat analyst expectations by a penny Thursday, but revenue dropped 20 percent and net income dropped 81 percent.

The company reported pro forma earnings of 4 cents per share for the fiscal fourth quarter, ended June 30. Analysts surveyed by First Call expected earnings of 3 cents per share.

But revenue dropped 20 percent, from $5 billion a year ago to $4 billion, and pro forma net income dropped 80 percent, from $717 million to $134 million.

"We've taken a haircut on earnings, but we are protecting what matters for the long-term shareholders," Sun Chief Executive Scott McNealy said in a conference call today. "We want to protect our research-and-development programs and employees."

Sun's R&D budget increased 17 percent compared with the year-ago quarter. "I think that'll pay off in the next three to five years," McNealy said.

Sun executives declined to predict how much revenue the company would garner in the current quarter, but said it would be more than $3.7 billion.

Sun's revenue growth has slowed as the fiscal year has progressed. In the first quarter, growth was 60 percent, in the second 44 percent, and in the third 33 percent. This is the first time in years, though, that revenue actually shrank.

Excluding charges and investment gains and losses and other adjustments, the company had a loss of $88 million, or 3 cents per share, compared with earnings of $720 million, or 21 cents per share, for the year-ago quarter.

For the fiscal year overall, Sun had revenue of $18.25 billion, a 16 percent increase from last year's $15.72 billion. But earnings decreased 22 percent, from $1.86 billion to $1.45 billion.

Some analysts expect Sun to lower its predicted revenue for the current quarter.

"We believe the consensus revenue growth forecast for Sun for (the first quarter of 2002) of around $4.15 billion is too high," Sanford Bernstein analyst Toni Sacconaghi said, projecting revenue of $3.6 billion--28 percent lower than the year-ago quarter. "We do not see evidence of an imminent domestic rebound, and we do believe that Europe is continuing to weaken."

A year ago, with the Internet downturn just beginning and the spending slowdown not yet under way, Sun had been sitting pretty. Server sales were booming, the company's vision of networked computers was vindicated by the success of the Internet, and longtime rival Microsoft was under intense legal pressure. Now things have changed.

Server sales declined 4 percent in the first quarter. Sun required employees to take a week of vacation to cut costs. Storage systems are stealing revenue and attention from server sales, and Sun is likely trying to lure Hitachi Data Systems to help it plug a conspicuous gap in its storage-product lineup. Microsoft has server software far better than its previous products, has attracted attention with its .Net initiative, and has escaped the government's order to split it in two.

Another worry at Sun is its new UltraSparc III chip. The company had hoped a version of the chip using copper technology would be shipping at 900MHz by March, but last quarter Sun told analysts to wait for July. Now the company has said the 900MHz chip uses older aluminum technology, suggesting problems with the copper manufacturing process.

"No channel partners were aware of 900MHz availability, which is somewhat worrisome, given that Sun stated it would initially be available in July," Sacconaghi said.

Chief Operating Officer Ed Zander said newer chips running at 900MHz and 1GHz are coming, as are chips that use the copper technology.

Sun had difficulties keeping up with demand for some of the new Ultrasparc III computers, but Zander said Thursday that all models are now available. "We now can ship desktops, small servers and midrange servers in volume," he said.

Meanwhile, Sun is directing its sales force to take on IBM through a campaign called "Blue Bomber." The company has won over customers and replaced 50 IBM mainframes with its servers since January, Zander said.

In an interview, Chief Financial Officer Mike Lehman said one way Blue Bomber works is to find mainframe programs Sun thinks will run better on its products, then have "a team of people swarm a customer and show them how to port the application" to Sun's computers.

At the same time, Sun has been steering its sales force in a different direction, tackling large corporations instead of the Internet service providers and telecommunications markets Sun has focused on in the past, McNealy said.

That redirection won't happen overnight, though, Lehman cautioned. It takes time for a sales force to understand what a large customer is doing and where it's headed, what computing equipment it's using and where Sun can get a foothold.

Sun executives derided Microsoft's decision to stop shipping Java along with Windows XP, but said they're working with computer makers to make sure it's as easy as possible to install the software.

Possible ways of distributing Java include having computer makers preinstall the software or offering Web sites from which the software can be downloaded, Lehman said.

"They have made it abundantly clear they do not want to participate in the Java environment," Lehman said of Microsoft's move.

Sun thus far has avoided laying off staff and hopes to avoid it in the future, but the company is putting pressure on its lowest 10 percent of performers. "Our objective is to help them understand what they need to do. If they correct it, they move up. If not, maybe it's not the right place," Lehman said. "Attrition is going to happen. We want it to be the right attrition."

And Sun continues to assume greater control over the iPlanet e-commerce software group formed jointly with AOL Time Warner. "We are...unwinding it to take more control over the infrastructure and technology under Sun," Zander said.

Lehman said roughly two-thirds of iPlanet's 3,000 employees are Sun employees. The iPlanet partnership concludes in spring 2002. Though AOL will continue to own some of iPlanet's intellectual property, Sun has been "investing more heavily in that," and the server software products are "an asset without much of a home" at AOL, Lehman said.

Sun's shares were up 45 cents, or 3.22 percent, to $14.44 after the bell Thursday.