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Profitable Again, Sun Looks Forward

UPDATED: If Sun CEO Jonathan Schwartz sounded rather upbeat on today's conference call with analysts to discuss the company's second fiscal quarter numbers, he had good reason.

Analysts were predicting profits of a penny, but Sun  beat that handily with a net profit of $126 million, or 3 cents per share for its second fiscal quarter of 2007. That's a major turnaround from its net loss of $223 million, or a loss of 7 cents per share, for the second quarter of fiscal 2006. The last time Sun had a profitable quarter was Q4'05.

"I'll start with the obvious and say that I'm very pleased with our Q2 results, which show great progress against our overall turnaround plan, give concrete evidence to the market appeal and acceptance of our product and roadmaps, which all add up to growth and gross margin as well as profitability," said Schwartz.

That profit came even after $58 million in stock-based compensation charges, $26 million in restructuring costs and a related tax benefit of $4 million. This had a net impact of approximately ($0.02) per share on a diluted basis.

Revenues for the second quarter of fiscal 2007 were $3.6 billion, up 7 percent from the sales of $3.3 billion in Q2 of the year before. Sun pointed to better server sales and growth in Solaris products as the main drivers.

Sales of SPARC-based systems grew by 18 percent and Solaris is up to seven million licensees. Schwartz also trumpeted yesterday's news that Intel  would endorse Solaris as the default Unix on its Xeon line.

"There could be no stronger confirmation of the strength of Solaris in the marketplace," he said. "Solaris is now unequivocally established as a leader in network infrastructure, not just on computers built by Sun and not just on SPARC, but on microprocessors in computers built by HP, Dell and IBM."

Schwartz also addressed the news of a $700 million private placement transaction with KKR Private Equity Investors, L.P. The investment is a combination of $350 million in convertible senior notes due in 2012 and $350 million of convertible senior notes due in 2014.

Schwartz insisted the investment wasn't a bailout, but that he has plans for the money. "We certainly don't need the money. It's an opportunity transaction, and to the extent we can get a leg up we're going to take advantage of it."

Sun's Chief Financial Officer Mike Lehman said the primary reason for Sun's "over achievement" was higher revenues, mainly from systems sales, and improved operating margins. Sun shed 1,600 employees and is down to 34,600 worldwide.

Storage was down slightly because StorageTek had an abnormally strong quarter in FY06. The lower dollar also contributed to profits thanks to strong overseas sales. The U.S. was actually down four percent over the prior year while Asia/Pacific was up 20 percent.

Sun is also undertaking an effort to cut down its inventory. It was down $20 million this past quarter, and the company expects further reduction as it reduces the time between order and fulfillment. Currently the company has four weeks of inventory but wants to get it down to one week, Lehman said.

"We had a lot of things go our way in that quarter, and we don't want to predict things will go our way in every quarter, but going forward there's a lot of opportunity out there," said Lehman.