Sun to Wall St.: Back in Black

Sun Microsystems, fresh from news of a renewed alliance with chipmaker Intel, reported its first quarterly profit in more than a year in financial results reported Tuesday.

Sun posted net income of US$126 million, or $0.03 per share, on a 7 percent gain in revenue to $3.57 billion, in its fiscal 2007 second quarter that ended Dec. 31, 2006.

Sun beat the estimates of analysts, who forecast a tiny profit of $0.01 per share on revenue of $3.52 billion, according to Thomson Financial, after five consecutive quarterly losses.

Sun reported a net loss of US$223 million, or $0.07 per share, on revenue of $3.34 billion in the previous year’s quarter, and a net loss of $56 million, or $0.02 per share, on revenue of $3.19 billion in the previous quarter.

Sun attributed the revenue gain to strong sales of its x64 line of servers powered by Advanced Micro Devices (AMD) processors as well as growing acceptance of its Solaris 10 operating system.

Sun also announced a US$700 million investment in the company by KKR Private Equity Investors, the publicly traded fund of the private equity firm Kohlberg Kravis Roberts & Co. KKR will also nominate a director to Sun’s board.

"This is an opportunistic investment," said Sun Chief Executive Officer Jonathan Schwartz, in a conference call with investment analysts. Even though Sun has US$2.6 billion in cash on hand and wouldn’t necessarily need the additional investment, he said the company would use the proceeds for "strategic investments and growth," without elaborating.

In a later conference call with reporters, Bret Schaeffer, Sun’s vice president of finance, said the deal with KKR was not done as part of a plan to take Sun private, even though KKR engineers leveraged buyouts with many of the firms in which it invests.

The earnings report follows by one day a joint announcement by Sun and Intel to form an alliance to promote each other’s core products. Sun will build a line of servers and workstations with Intel chips, including a dual-processor Xeon system expected by the end of June. Intel, in return, has agreed to promote the Sun Solaris OS. Sun stopped buying Intel processors in 2003 when it switched to AMD’s Opteron line. Sun also makes its own processors, called SPARC and UltraSPARC.

Sun has undergone a restructuring under Schwartz, who succeeded Scott McNealy in April 2006. McNealy remains chairman. Sun eliminated 5,000 jobs but also acquired StorageTek, giving it a foothold in the storage business. Sun has grown server sales as well. In the third quarter of 2006, it ranked fourth among major server vendors in sales, but it recorded a strong 15.8 percent sales increase from the previous year, according to an IDC research report.

"Sun’s financial performance this quarter demonstrates that our strategy and discipline are paying off," Schwartz said in a prepared statement.

But Sun trimmed its forecast for its current fiscal third quarter, which ends March 30, expecting revenue to be down by between 3 percent and 5 percent compared with the second quarter. "The quarter will be seasonally challenging," said Mike Lehman, Sun’s chief financial officer.

Sun’s share price rose skyward on the news, up $0.46 to $6.13 a share, an 8.3 percent rise, in after-hours trading.

-Robert Mullins, IDG News Service (San Francisco Bureau)

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Copyright © 2007 IDG Communications, Inc.

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