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Sun's outlook boosts shares

Despite skepticism, shares of the server maker surge after the company forecasts that revenue will increase slightly for its current quarter.

Shares of Sun Microsystems surged Friday after the company maintained its guidance that revenue would increase slightly for its current quarter and announced its second conference call in 24 hours.

Sun shares were already up on the company's outlook, but spiked about 7 a.m. PT after the company announced a conference call scheduled for 10 a.m. PT. Shares rose 12 percent, or $1.01 to $9.90, in early trading. Sun said it couldn't comment on the topic of the call.

The action comes a day after Sun managed to dispell some skepticism about the company's quarter. In a conference call Thursday, Sun Chief Financial Officer Mike Lehman said the server maker stood by its guidance that revenue would increase slightly for the third quarter of fiscal 2002, which ends March 31. The company had $3.1 billion in revenue for the most recent quarter.

However, analysts this week voiced pessimism, and Lehman was cautious.

"There are still a significant number of risks out there that may limit information technology spending in the next six months," Lehman said. In addition, Sun is counting on more orders than usual in the last four weeks of the quarter.

Most analysts tweaked their estimates, but remained cautious about the company with Merrill Lynch strategist Steven Milunovich noting Sun's "degree of difficulty has increased."

On the brighter side, Lehman pointed to promising long-term economic trends in areas such as housing starts and automobile production. In addition, the company expects gross margins--a key measure of profitability--to increase as the company puts behind it the transition from UltraSparc II to UltraSparc III CPUs and consequent inventory complications.

Lehman also said the company is making progress in achieving its goal of profitability in its quarter ending in June.

Some are more skeptical. In a Monday report in which he lowered projections, Sanford C. Bernstein analyst Toni Sacconaghi said, "Demand continues to be weak for Sun products, particularly in the U.S., and we believe that it may be difficult for Sun to show any sequential growth" in the quarter.

Goldman Sachs analyst Laura Conigliaro said she believes Sun can achieve revenue the same as or slightly higher than that of the fiscal second quarter but that "June profitability is probably going to have to come on lower revenues."

Merrill Lynch analyst Steve Milunovich said Sun employees and sales partners expect further job cuts, adding that sales-program cost controls to achieve June profitability could hurt sales later in 2002.

During the Internet heyday, Sun had all other server makers scrambling. But with the recession and the demise of so many dot-coms and initiatives, the company has lost ground to IBM and other rivals. Plunging revenue forced Sun to lay off staff, cuts that Lehman said should be largely complete by the end of March.

Things have eased now, though. Thursday's call marked the second quarter in a row that Sun had the luxury of maintaining guidance rather than lowering projections.

The proposed merger of Hewlett-Packard and Compaq Computer is making Sun look more attractive as a stable server maker, Lehman said. "We're able to get an audience more and more where (HP and Compaq) have an installed base," Lehman said.

Lehman acknowledged the company's problems in keeping up with demand for the hot-selling two- to eight-processor V880 server. "We are doing our best to get the lead times down" there, he said.

Production is speeding up for higher-end products such as the top-end E15K, which can accommodate 72 processors in top-end business configurations. The difficulty there is recording sales quickly, since revenue often isn't recognized until the system is installed, working and accepted by the customer.

"We're building a lot more than we did in the December quarter. We're meeting our internal build plan for that," Lehman said of the E15K "Starcat" system. "The later an order comes in a quarter, the harder it becomes to build it, ship it, and install it" in time to record the revenue.

Profit margins will increase for a variety of reasons, Lehman said. The company sees improved yields on its UltraSparc III chips, which are manufactured by Texas Instruments. Also, with most products now shipping with the UltraSparc III, it's easier to forecast demand and therefore manage inventory. And people are buying products with higher margins.

Pricing still is competitive, though. "The competitors are going after the deals, and the pricing environment is still pretty nasty out there," Lehman said.

Operating expenses will increase as Sun protects its budget for research and development and pays higher incentives to salespeople and the broader employee base.

News.com's Tiffany Kary contributed to this report.

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