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Sun under the microscope with earnings, new products

Hewlett-Packard's sour financial news doesn't bode well for Sun Microsystems, which is due to report earnings Thursday, or for other companies whose revenue depends on high-end hardware.

Hewlett-Packard's sour financial news doesn't bode well for Sun Microsystems and other companies whose revenue depends on high-end hardware.

Sun, scheduled to report earnings Thursday, specializes in high-end hardware such as servers. That's the same market HP was counting on to protect it against faltering PC sales but that it specifically mentioned as weaker than expected when it warned Jan. 11 of financial trouble ahead.

Analysts expect Sun to meet its earnings forecasts when it reports results Thursday, with an expectation of net income of 16 cents per share, according to First Call. But skepticism set in during December, and HP's problems reflect on Sun's longer-term future, analysts say.

"While we have believed for some time that HP's revenue expectations were too optimistic...we were surprised by the magnitude and suddenness of the deterioration, particularly on the enterprise side," said Sanford Bernstein analyst Toni Sacconaghi. "HP's comments are worrying for other enterprise vendors, particularly Sun."

Sun undaunted
Sun, though, is marching staunchly forward, planning to release details on the upcoming server version of Java software on Tuesday and to announce its first sub-$1,000 servers on Wednesday.

Sun will gather with its software partners Tuesday in San Francisco to trumpet the progress it's made with Java 2 Enterprise Edition (J2EE), a version of Java designed to run on servers handling tasks such as e-commerce. While IBM and some other companies initially had some reservations about how Sun handled licensing terms for the software, those concerns have faded, and most partners like the technology.

On Tuesday, Sun will detail features in the upcoming version 1.3 of J2EE, which Sun executives have said is likely to be released in June at Sun's JavaOne conference.

Wednesday, Sun chief operating officer Ed Zander and other top executives will provide details on the company's acquisition of Cobalt Networks, a company that builds low-cost servers using AMD chips and the Linux operating system. The servers are popular for tasks such as hosting Web pages at Internet service providers and "caching" data around the Internet so Web surfers retrieve information faster.

Meta Group says that in the wake of Hewlett-Packard's earnings warning, it's clear Sun Microsystems and other Unix server vendors may face significant challenges in 2001.

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Sun plans to announce two models of Cobalt products, the RaQ XTR and the Cache RaQ 4, a source familiar with the event said. The low-end Cobalt systems will cost less than $1,000, a first for Sun, the source said.

In addition, Sun will describe new Netra servers, models designed for telecommunications companies. The 1.75-inch-thick Netra T1 series, code-named Flapjack and released in 1999, will be joined Wednesday by the Netra X1 and the Netra E1, the source said.

In keeping with the Flapjack theme, Sun's launch event Wendesday has been code-named IHOP--the same as the popular pancake restaurant chain.

Will others fall victim?
Sun isn't the only hardware company facing damage from the overall sales slowdown. Compaq Computer, which reports earnings Jan. 23, is already hurting from waning PC sales and needs to compensate with revenue from services and high-end products.

No company has more high-end business at risk than IBM. But Salomon Smith Barney analyst John Jones believes Big Blue will be protected because it has solid revenue from its services business, its chip-building factories, and new mainframes going on sale.

Jones, though, reduced his expectations for Sun on Friday, lowering his target stock price from $55 to $30. "Our concerns are raised that future revenue and earnings-per-share growth will come (from) drawing down the backlog rather than from new orders," he wrote in a research note.

One sector of corporate computer hardware might be spared from the blood-letting, or at least not as drained. Merrill Lynch analyst Thomas Kraemer believes storage companies such as EMC might not be as exposed to the current spending pullback.

"We would not extrapolate (HP's) weakness to the storage sector," he said in a research note.

Inrange, a maker of high-end storage network hardware, reported Thursday that it's making more money than expected.

Sun, however, might find a silver lining in some of Kraemer's words. He said he believes part of HP's problem is its own "competitive weakness," and consequently, "We don't believe that HP is the best proxy for the rest of the sector."