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Sun steers clear of computing slump

The server giant meets analyst expectations for quarterly earnings, reporting a net income of 16 cents a share.

Sun Microsystems met analyst expectations for quarterly earnings Thursday, amid a slowing economy many analysts think will later hit the successful Unix server specialist.

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Sun COO: "The PC era is over"
Ed Zander, COO, Sun Microsystems
Sun posted net income of 16 cents a share, just as analysts surveyed by First Call had expected the company to report for the second quarter of fiscal 2001, which ended Dec. 31.

Excluding gains on the sale of equity investments and acquisition-related charges, Palo Alto, Calif.-based Sun had a net income of $552 million, a 56 percent increase from the $354 million earned in the same quarter the year before. Revenue increased 44 percent from $3.55 billion to $5.12 billion, Sun said in a statement.

Like its competitors, Sun faced slowed spending in December in the United States, executives said Thursday, but the company is standing by net income estimates for the first half of 2001 while revenue dips only a few percent.

"We...experienced a sudden, unexpected and noticeable drop-off in demand in December," Chief Financial Officer Mike Lehman said in an interview following the announcement. "When we noticed, we did the important and necessary things to balance our investments in the last month and made our quarter."

By cutting expenses, Sun matched analyst expectations for earnings per share in the most recent quarter and expects the pattern to continue through this and the next quarter, he said.

"We are very slightly lowering revenue expectations" for the second half of the company's fiscal year, which ends in June, Lehman said. Revenue growth should be between 30 percent and 35 percent, down from Sun's previous guidance of "the mid-30s," he said.

Analysts have been worried that troubles with high-end hardware sales that afflicted Hewlett-Packard also will hurt Sun, though they expected the company to meet expectations this quarter. IBM, benefiting from diverse revenue sources, surpassed reduced analyst expectations Wednesday.

"I must tell you quite up-front that this was quite a challenging quarter in terms of execution," Lehman said during a conference call after the release. But he boasted that Sun was among the few companies that didn't have to warn analysts to lower financial projections, measures taken by Sun's biggest competitors, IBM and Hewlett-Packard.

Sun has no lack of ambition. The company positioned new thin, rack-mountable servers unveiled Wednesday as products that put Sun on the offensive in fighting off competing machines using the Windows operating system from arch-rival Microsoft.

CEO Scott McNealy said in the conference call that the overall slowdown will thin out the second-rate companies. "I always prefer the tough times. It's where we can weed out the followers from the leaders, and we're leading in the marketplace," he said.

Moreover, customers may have delayed plans for further computerization, but they haven't changed them, Sun executives said.

"It's important to understand that large enterprises cannot stop investing in this Internet technology," McNealy exhorted. "The Internet is still wildly underhyped and underutilized and underimplemented around the world.

"A bigger issue for us is keeping the power on here in northern California. That's the biggest challenge right now," McNealy quipped.

Economics, not Sun's transition to upcoming systems using the new UltraSparc III chip, were at the root of the December order drop, President Ed Zander said. The company also sold 350 top-end E10000 servers in the quarter, systems that typically cost $1 million or more, he added.

Sun announced earlier Thursday that its partnership with America Online has led the online service to purchase products and services worth $400 million if purchased at retail, a significant addition to the $500 million worth of equipment it agreed to buy in 1998.

AOL now uses more than 4,000 Sun servers, Sun said.

McNealy warned earlier that the current economic slowdown will require the company to cut back on spending and hiring.

Including the gains on the sale of equity investments and acquisition-related charges, Sun had a net income of $423 million, or 12 cents per share, compared with $354 million, or 10 cents per share, for the year-ago quarter.