Sun Microsystems Posts Quarterly Profit

Sun Microsystems announced its first quarter results yesterday posting a slight profit as it continued to prosper from its corporate restructuring and improved gross margins. The revenue gain was a let down for investors who were hoping for better results to begin the fiscal year.

Sun Microsystems Inc., which was once one of Silicon Valley's most pugnacious technology companies, struck alliances during the first quarter with two of its fiercest former foes, Microsoft Corp. and IBM Corp.

This has helped the Santa Clara-based company to post a profit in the first quarter due to stronger sales and improved cost controls. Sun has now cleared a profit in four straight quarters.

Sun’s sales hit $3.22bn improving by close to one per cent. It also posted net profit of $89m or 3 cents a share, which is a marked improvement from last year’s net loss of $56m in the same period. Sun managed to turn the profit even with $113m in restructuring charges from layoffs.

However the sales were lower than the $3.27 billion which the Wall Street analysts were expecting. Shares of Sun declined 12 cents, or 2.1 percent, in after-hours trading after release of the report. The shares rose 11 cents to close at $5.71 in regular trading yesterday.

Importantly, Sun improved its gross margins by 5 percentage points to 48.5. The company also brought in $574m in cash during the quarter.

Jonathan I. Schwartz, Sun’s chief executive said, “Clearly we’re bullish about our long-term prospects,” in a conference call with analysts yesterday. He told the analysts, “Top-line growth remains our top priority for fiscal 2008.”

Sun’s profitability during the quarter was well appreciated by the analysts, but whether the company will experience sustained sales growth over the next year will be the real test.

Brent Bracelin, an analyst with Pacific Crest Securities said, “It’s encouraging,” referring to Sun’s performance during the first quarter. “But the question now is whether this is a company that’s going to grow. That question is probably going to take a few more quarters to answer.”

Sun’s chief financial officer, Michael E. Lehman, said yesterday he was hopeful of a gross profit margin of 44 percent to 47 percent in the 2008 fiscal year, a hike of 1 percentage point over the company’s previous forecast. He added that revenue growth will most likely be in the low- to mid-single-digit percentage range for the fiscal year, which began Oct. 1.

Lehman further said, “We have increasing confidence in our ability to deliver on our stated goals.” He said he expected operating expenses of $5.6 billion to $5.8 billion for the full year.

“We're thrilled with the progress we're making," Chief Executive Jonathan Schwartz said in an interview. "The turnaround has not only taken hold, it's now in full stride."

According to market research firm IDC, Sun commands 13 percent of the worldwide server market, trailing IBM with 31 percent and Hewlett-Packard Co. with 28 percent.