Sun Microsystems Sales Miss Target

SAN FRANCISCO – Sun Microsystems Inc. missed a lowered sales target in the third quarter, and although profit was in line with forecasts, the network computer maker said on Thursday it was not clear if the economic downturn it blamed for slow sales was ending.

``The results, sales and gross margins in particular, are a big disappointment versus expectations set in February. Clearly the environment for Sun's customers has deteriorated much more dramatically than they thought possible,'' Sanford Bernstein analyst Toni Sacconaghi commented after Sun released results.

Sales at Sun rose 2 percent to $4.1 billion from $4.0 billion last year in the third fiscal quarter, while operating earnings dropped by nearly half to $263 million, or 8 cents per share from $464 million, or 14 cents per share, in the quarter a year ago.

Sun had predicted on February 22 that it would earn 7-9 cents per share on a 10-13 percent year-on-year rise on sales, ranges that were below Wall Street's expectations at the time by as much as half.

Analysts had dropped their forecasts by this week to earnings in a range of 3-13 cents on sales of $4.45 billion, Thomson Financial/First Call research reported, and Sun said the consensus, adjusted to conform with Sun reporting changes, would have been 8 cents.

Sun soared over the last few years as companies threw together networks of its high-end computers to come to terms with the Internet, but the sudden technology slowdown has savaged growth rates that used to be the envy of the industry.

``Our results reflected the sharp decline in capital spending in the information technology sector, principally in the United States, although we did see some moderation of demand in Europe and Asia Pacific,'' Michael Lehman, Sun's chief financial officer and executive vice president, said in a statement.

Sun stock was steady in after hours trade at $21.01 on Instinet after a close of $20.71 on Nasdaq, where it had gained $2.13 in a rising market before the results were announced.

Sun shares have underperformed the American Stock Exchange Technology Hardware index by about 35 percent this year.

Outlook Mixed

Lehman told a conference call that revenue would rise slightly in the fourth quarter, compared to the third, with per share earnings flat to slightly down.

But Lehman forecast that revenue would rise 15 percent next year and per share earnings outpacing that increase.

``That reflects the extremely difficult comparisons we have in the first half and the kind of economic environment we are in right now,'' he said, adding that much of next year's gains would be in the second half.

He also told Reuters in an interview that much of the increase was based on Sun's ability to outshine competitors.

``It is largely driven by the relatively competitive position. It certainly is somewhat predicated on a healthier macroeconomic conditions in the second half of the fiscal year,'' he said.

The gross profit margin, the profit after cost of sales as percentage of revenue, was 41.6 percent in the third quarter and would take a couple of quarters to return to the high 40s, Sun's long-term goal, he told the conference call. Gross margins should improve slightly in the fourth quarter.

Sun is focusing on flexibility since it cannot forecast the big economic picture, Scott McNealy, the chief executive, told the conference call.

``Nobody knows whether it is the beginning or end of any particular trend,'' he said, despite positive comments by a number of technology executives this week that it appeared the end of the economic downturn was at hand.

``The real issue is can you turn on a dime as the needle starts slamming back and forth.''