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Sun Ekes Out Small Profit in Fiscal Q4.

By Timothy Prickett Morgan

Sun Microsystems made good on its promises to get profitable by its fiscal fourth quarter 2003, squeaking by with a net income of $12m on sales of $2.98bn.

That is a drop of 12.8% compared to last year's fourth quarter, a time when a number of key senior managers at the company left to pursue other interests as Sun entered what it knew was going to be a tough fiscal 2003.

For the year, Sun has had revenue declines in each quarter, which is a situation that many IT vendors have experienced, and indeed, which Sun experienced throughout fiscal 2002. But Sun, having dropped from the stratosphere over the past two years, was showing bigger percent changes than most other IT players. Fortunately for Sun, the company appears to have hit a point where it is once again flying level, and if the economy improves in the sectors where it plays best - financial services for one - then Sun might even be poised once again for revenue growth and some more substantial profits.

Steve McGowan, Sun's chief financial officer, and Scott McNealy, Sun's CEO and president, gave every indication in a conference call with Wall Street analysts yesterday that the compensation packages for employees in fiscal 2004 were aimed at this goal. McNealy is also particularly keen on pulling cash out of operations, something Sun has been able to do for 35 straight quarters. Sun is still sitting on $5.7bn in cash, and added $200m to the coffers in fiscal Q4.

Sun reported sales of just over $2bn across all of its hardware and software product lines in the fourth quarter, down 20.1% from the same quarter last year. Services sales were up 7.2% to 979m in the quarter, and it is safe to say that if Sun didn't peddle services as much as it did, it would not have been profitable in the quarter. McGowan said that services sales in the fourth quarter and for the full year were at record levels for Sun. He said that storage was a relative bright spot in the quarter, too, with sales up 15% sequentially from the fiscal third quarter, but storage sales were still down 16% year-on-year. The new StorEdge 6000 machines, which are midrange storage arrays that were announced in May, were selling decently, according to McGowan, with about 500TB of capacity sold in the quarter.

Computer systems sales (by which Sun means workstations and servers, as distinct from other components such as processors) were down in the quarter, but McGowan said that data center servers such as its high-end Sun Fire 12000 and 15000 servers were strong, and sales of midrange V480 and V880 servers were relatively strong. However, Sun ended up with a $50m backlog in sales of its new entry Sun Fire V210 and V240 servers, which are based on the UltraSparc-IIIi "Jalapeno" processors because of a quality issue with a third party component in the machines. (McGowan did not identify the component.) Sun halted shipments of the products, and hopes to resume them in July or August.

For the full fiscal year, Sun had $11.4bn in sales, down 8.5% from fiscal 2002. Services sales were up 7% year-to-year to $3.64bn, but product sales dropped 14.3% to $7.8bn. The drop in sales has as much to do with a shift to lower-cost products as it does with the intense level of discounting in the Unix workstation and server markets and the middleware software markets that make up the bulk of Sun's sales. After restructurings and writeoffs, Sun booked a loss of $2.4bn for fiscal 2003, compared to a loss of $587m for fiscal 2002.

On a geographical basis, McGowan said that the company's revamped solutions-based sales model has been pushing sales up in Germany and Spain in both Q4 and in fiscal 2003. Similarly, sales in China, India, and Mexico were up because of what McGowan called "positive macroeconomic issues" in those countries. Sales in the United States were up 10% in the fourth quarter to $1.3bn, which is a good sign, but were down 23% for the fiscal year. In Europe, sales were up 8% in the quarter to $954m, but down 2% for the year. Sun's sales in Japan were $209m in Q4, down 18%, but for the full year - thanks in part to currency exchange rates - sales were only down 1%. Other regions of the globe accounted for $507m in sales during fiscal Q4.

McNealy spent a lot of time talking about cash, which is apparently king at Sun and everyone is being told this because cash can lead to profits if Sun can keep costs under control. "We're still monetizing the bubble," he explained. "Very few companies could ride the bubble up and also ride it down." And just to head off the Wall Street analysts at the pass, he once again reiterated Sun's position in investing in research & development as opposed to focusing on short-term profits. "I suppose we could have done more to get costs out," he said referring to Q4, "but it might endanger our long-term prospects." As for any qualms anyone had a year ago about the departure of president and COO Ed Zander and CFO Mike Lehman, McNealy laid that matter to rest succinctly. "The team has never been stronger and the prima donna count has never been lower," he quipped.
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Author:Morgan, Timothy Prickett
Publication:Computergram International
Geographic Code:1USA
Date:Jul 23, 2003
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