Weak Server Demand Shades Sun’s Numbers

Not even a healthy influx of low-cost products could help Sun Microsystems from losing revenue for the ninth straight quarter in a row.

The Santa Clara, Calif.-based network computer maker Tuesday posted a profit of $12 million but confessed it’s revenue fell to $2.98 billion from $3.42 billion in the last three months. Sun said the slump was a continuation of worldwide lackluster demand for servers.

The company also said its service margins were seasonally down and it was dealing with service and product backlog on some undisclosed models.

“Obviously we were dealing with a tough year,” Sun CEO Scott McNealy said during a conference call to analysts and press. “We didn’t grow the business. That’s something we’re not happy with and we’ve got all our energy focused on both growing the company and being profitable for this fiscal year.”

The next three months are going to be critical for Sun to hopefully turn the tide. The company is expecting to officially launch its Project Orion billing system as well as its Mad Hatter desktop operating system.

Still, the company said it prevented a bigger skid by paying down $200 million of its debt and taking other cost cutting measures.

“We reduced SG&A expenses by nearly $500 million and improved gross margin by almost 4 percentage points on an annual basis,” Sun CFO Steve McGowan said. “We also reduced capital expenditures and inventory by almost $200 million each while maintaining our nearly $2 billion investment in R&D, the lifeblood of our company.”

Sun also said it had a net income of $12 million, or “nil” per share, down from $61 million, or 2-cents, a year ago as part of its fiscal fourth quarter. A survey of analysts by Thompson/First Call expected Sun to earn 2-cents per share.

In the last year and a half, Sun said it has launched 20 products that target the low-end space. Additionally, Sun expanded its “Unbreakable” alliance with Oracle and padded its number of Solaris x86 Platform Edition licenses by 30 percent in the last six months.

The company also said it remains committed to SPARC and the Solaris Operating System, which it says are thriving on 32-and 64-bit platforms.

Despite the revenue news, McNealy was upbeat about the company’s growth.

“We’ve made solid progress throughout the fiscal year, delivering on key initiatives such as NC03, low cost computing, N1 and Project Orion,” McNealy said. “We enter the new fiscal year with an intense focus toward growing revenue, improving profitability and maintaining positive cash flow from operations. We’re well positioned to take full advantage of market opportunity over the long-term with a strong pipeline of innovations, one of the world’s largest partner networks, and an intense competitive drive to deliver quality products and services with value to our customers and shareholders.”

Part of that optimism stems from Sun’s maneuvers in the UNIX and Linux space including its licensing agreement with SCO Group , which may save it the same fate as other vendors.

Sun said it also grew its customer base with keys wins such as China Ministry of Railways, Defense Advanced Research Projects Agency, Ericsson, Hong Leong Finance, Home Box Office, Petrobras, Priceline and San Diego Super Computer.

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