Sun Reports Positive 4Q Revenue, Earnings

For its fourth fiscal quarter, ended June 30, Sun, Santa Clara, Calif., reported revenue of $3.1 billion, up 4.3 percent compared with the $3 billion reported in the same quarter of last year. Quarterly income was $795 million, or 24 cents per share, compared with a $1 billion loss, or 32 cents per share, in the comparable quarter last year.

However, factoring out gains from the $1.6 billion Microsoft settlement, along with a number of other one-time events, Sun would have actually posted a loss of $169 million, or 5 cents a share--still a considerable improvement over the fourth quarter of 2003.

For the entire year, Sun reported revenue of $11.2 billion, down 2.2 percent compared with the $11.4 billion in total revenue in 2003. Sun lost $376 million, or 11 cents per share, in fiscal 2004 compared with a $3.4 billion loss, or $1.07 per share, in fiscal 2003.

Sun generated a positive cash flow of $2.2 billion for the year--its third highest since 1995. After factoring out the money it received from Microsoft as part of the settlement agreement, along with $350 million in deferred other income related to the settlement, the company actually had a positive cash flow of $276 million--the lowest since 1995. Sun said it will release final results for the year and quarter after it works out how to handle the Microsoft settlement with the Securities and Exchange Commission.

Also during Tuesday's earnings call, Jonathan Schwartz, Sun's president and COO, said Robert Youngjohns, who had been running Sun's global sales, has been promoted to executive vice president of strategic development and Sun Financing. Replacing him as executive vice president for global sales is Rob MacRitchie.

At the end of the quarter, Sun's head count was just shy of 35,000 people, down from 39,433 at the end of the fourth quarter of fiscal 2002.

Steve McGowan, CFO and executive vice president of corporate resources, said the company is doing well overall on the product side.

Server revenue for the quarter was $1.7 billion, up 4 percent from last year. The growth was mainly due to the ramping up of the company's UltraSPARC IV processor-based servers, which accounted for more than 30 percent of server revenue in the quarter and should grow to more than 50 percent in the current quarter, McGowan said. While not material, Sun's low-end server revenue also doubled this quarter compared with last year due to sales of Advanced Micro Devices Opteron-based servers, he said.

Sun's storage business barely eked out a 1 percent rise in revenue to $427 million, said McGowan. The company's storage-attach rate, or how much storage is sold with the servers, was 26 percent. Even so, fiscal 2004 was the third consecutive year in which the company's attach rate rose, he said.

Services revenue reached $1 billion, up 7 percent over last year, making it the first billion-dollar year for services at Sun, McGowan said.

Even stronger for Sun was the growth in deferred revenue, which in the fourth quarter rose to $2.2 billion, up 14 percent over last year.

The rise in server sales not only shows Sun's hardware strength, it also indicates better things to come for other products such as software, storage and services, said Scott McNealy, chairman and CEO of Sun.

"Volume matters," McNealy said. "It is the leading indicator, and what drives this company. And it helps our channel partners improve their sales."

When asked whether rising sales of x86-based servers might cannibalize sales of the company's UltraSPARC-based servers, McNealy said that both are rising and are starting to "chew" into the overall x86 server market. "A lot of the business goes through the channel, so we just don't know [if there is cannibalization]," he said.

On the business side, Sun has followed through on a plan it unveiled in April to cut overhead by $475 million over the space of a year, including laying off 3,300 people. McGowan said the company has notified 2,400 people of impending layoffs, and expects to notify the remainder during the first half of fiscal year 2005.

As usual, McNealy couldn't help noting how he believes the press and analyst communities unfairly criticize Sun and its business strategy.

"The No. 1 complaint I hear from customers after hearing about our strategy is, 'Why don't you tell people about that?' " he said. "I say we are, but no one is writing about it. Maybe now you will write about it."