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Sun meets, warns on 4Q
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April 19, 2001: 5:30 p.m. ET
Server maker misses revenue target, sees lower profits, revenue ahead
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NEW YORK (CNNfn) - Sun Microsystems logged a fiscal third-quarter profit that fell sharply from the same period a year earlier and said its revenue and profit during the current quarter will fall far below recent expectations.
The company, a leading supplier of network servers and high-end computer workstations, said it earned $136 million, or 8 cents per share, during the quarter ended April 1. That was in line with the lowered forecasts the company provided analysts when it warned in February that it would miss its previous targets.
Sun's fiscal third-quarter revenue was $4.1 billion, up slightly from $4 billion a year ago but below the 10 percent-to-13 percent annual increase the company had told the Street to expect.
Shares of Sun (SUNW: Research, Estimates) rose $2.13 to $20.71 on Nasdaq ahead of the earnings news, which was released after the closing bell. They fell 91 cents to $19.80 in extended hours trade.
Sun is a leading supplier of network servers and software as well as high-end computer workstations. The company is the world's top supplier of mid-price range Unix servers, so-named for the operating system they run. These systems are used primarily to power the Internet and Web-based businesses.
In February, Sun executives lowered their revenue and earnings targets for the fiscal third quarter, blaming the shortfall primarily on the slowing U.S. economy and its subsequent impact on information technology spending.
Prior to that warning, analysts generally had expected Sun to post third-quarter sales of roughly $5.3 billion, suggesting a more than 30 percent year-over-year increase.
On top of the general slowdown that has weighed on the entire technology industry, Sun has been facing increasing competition in the market for mid-range servers during the past year and a difficult product transition.
IBM has been very aggressive in its server efforts, taking aim specifically at the mid-range Unix server market and making it very clear that it aims to unseat Sun as the leader there. Hewlett-Packard also has taken aim at that market with its new "SuperDome" server, although that product so far has had limited success.
Sun also has been dealing with product transition issues as it ramps production of its latest mid-range server, called Sun Fire, which it rolled out late last month.
Michael E. Lehman, Sun's chief financial officer, said in a teleconference Thursday that slower sales, increased pricing pressure from its top competitors and the shift toward the new systems all weighed on its profits during the quarter.
During the quarter, he said Sun's booking had dropped 27 percent from the prior quarter.
Sun's gross margin, the percentage of sales remaining after subtracting product costs, was 41.3 percent in the fiscal third quarter. That compares with 52.2 percent during the same quarter a year ago.
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Looking ahead, Lehman said he expects Sun's gross margins to improve, but at the same time, he said the company expects to report much weaker financial results in the current quarter than previously expected.
He said the company expects revenue in the fiscal fourth quarter to be slightly above the $4.1 billion the company just reported for the third quarter, while earnings per share growth in the fourth will be "flat to slightly down."
First Call most recently had an earnings per share estimate of 10 cents per share for the company during the fourth quarter and a revenue forecast of roughly $5.3 billion, suggesting a 29 percent sequential increase.
For the coming fiscal year, he said Sun is targeting top-line growth of around 15 percent, much of that coming in the second half. He said he expects earnings per share to grow at greater rate than revenue next year.
"Going forward, we will continue to make the necessary investments to ensure that Sun retains its competitive advantage over the long run," Lehman said. "At the same time, we will focus on the appropriate trade-offs in order to align our cost structure with our revenue growth expectations." 
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