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Sun Posts Modest Quarterly Earnings
By Mark Long
November 6, 2007 8:41AM

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Sun Microsystems reported quarterly results that beat out last year's performance, with Solaris reaching nearly 11 million licenses in the quarter. Sun's server unit sales declined for the third straight quarter, but Sun CEO Jonathan Schwartz said the market is now trending away from little servers in favor of smaller numbers of virtual servers.

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   Sun Microsystems posted a net income of $89 million, or $0.03 per share, for the company's first quarter, versus a $65 million loss in the year-ago period. Revenues amounted to $3.219 billion -- a 1 percent rise from one year earlier.

During the quarter, Sun saw strength in high-end enterprise systems and infrastructure Relevant Products/Services software, and was able to stabilize its storage business, noted chief executive Jonathan Schwartz.

"Clearly, we are bullish about our long-term prospects as evidenced by our aggressive share repurchase in the first quarter totaling approximately $1.25 billion or 245 million shares," Schwartz explained. Still, the company's latest quarter was seasonally challenging "and top line growth is still an area of focus," Schwartz added.

Challenging U.S. Environment

Sun's latest quarterly results indicate that the company continues to make progress in realizing its longer-term financial objectives, said Sun CFO Mike Lehman. For example, the company's 48.5 percent gross margin represents an increase of 5 percent from one year earlier and a seven-year high for the company.

Sun products also continued to see strong demand overseas, most notably in the emerging markets of China and India. From a geographical perspective, Sun enjoyed revenue growth of approximately 5 percent in Europe, the Middle East, and Africa, about 6 percent growth in Asia-Pacific, and 4 percent within the Americas, excluding the U.S., Lehman noted.

Although Sun's identity-management platform continued its strong growth with large deployments within the U.S. federal government, the company's overall sales within the U.S. were down 4 percent year-over-year. "We certainly have seen some slowing in the financial services especially those that were more exposed to the sub-prime mortgage issue," Schwartz noted.

Still, Schwartz said he thinks that the retail banking, commercial banking, and the capital markets are otherwise strong and are continuing to look at technology from Sun and other vendors as potential growth vehicles. Moreover, Sun's CEO said he sees relative strength in telecommunications.

Sun worked with its major U.S. channel partners and decreased the levels of inventory in the channel by around $20 million in the latest quarter, Lehman noted. "Overall, channel inventory levels had been reduced by more than $100 million in the past five quarters," Lehman explained. "While this has a negative impact on current year revenues, this helps us improve profitability over time."

Looking Ahead

In software and services, Solaris reached nearly 11 million licenses in the quarter, with over two million sockets now under commercial license. Sun's professional and educational services division demonstrated 7 percent revenue growth and strong margin performance, Schwartz noted. (continued...)