Sun Pulls Out A Slim Profit In A Tough Quarter

Sun Microsystems continued its recovery from a multiyear tailspin, reporting improved revenues and profitability for its third fiscal quarter ended April 1, 2007.

Revenues for the quarter were $3.283 billion, an increase of 3.3 percent over the third quarter of fiscal 2006. Total gross margin was 44.5 percent, up from 43 percent in Q3 ’06. Net income for the third quarter was $67 million, or $0.02 per share on a diluted basis, a big improvement over the $217 million net loss in Q3 ’06.

There were quite a few big charges impacting net income for the third quarter, such as $50 million of stock-based compensation charges, $35 million in restructuring charges, $75 million in charges related to acquisitions in fiscal 2006, benefits for $5 million of gain on equity investments, $54 million of settlement income and $8 million of related tax effects. The net impact of these six items reduced earnings per share on a diluted basis by approximately $0.02.

Sun’s profit beat expectations, but its revenues were $100 million short.

Sun  is now sitting on almost $5.5 billion in cash. When asked on a conference call with financial analysts what he’d do with it, Sun Chief Financial Office Mike Lehman played it close to the vest, saying there would be some board meetings this quarter, where the board would look at the company’s capital structure and decide on any potential moves, such as a stock buyback.

CEO Jonathan Schwartz was happy with the numbers, and reported there was only slight weakness toward the tail end of March. “As we hinted at on the second quarter call, we expected Q3 to be seasonally challenging and it was,” he said on the investor call.

A slow March in the U.S. and UK limited overall growth, but services and deferred income grew, a sign of durability of its relationships with customers, he said.

Sun is also continuing to pick up customers, even with news of new Xeon-based servers and Niagara 2 in development. “I continue to be surprised by the design wins we’re getting,” said Schwartz. “I think in general there’s nothing we’ve seen to suggest customers are on hold. We continue to see more and new opportunities unfold.”

Sun announced an alliance with Intel  this quarter, and also has reported progress on its next generation of Niagara chips, codenamed Rock and due in 2008. Sun also announced new mainframe-class servers as part of its long-term relationship with Fujitsu.

The company announced a number of major design wins, including sales to Clemson University, the Las Vegas Valley Water District, LG Micron of Korea, National Health Service (NHS) of England, Medavie Blue Cross and the Stanford Linear Accelerator Center (SLAC).

For its fourth quarter, which would be July 1, Sun expects a revenue increase of 15 to 18 percent, with gross margins of 42 to 44 percent. Operating expenses will be around $1.475 to $1.5 billion, with $75 million in amortization charges, $50 to $55 million in stock-based compensation and $50 million in interest income.

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