Sun warns of Q1 loss due to U.S. economic woes

Vendor reports fourth-quarter profit drop, says it expects smaller purchases by customers

Sun Microsystems Inc. today reported a sharp drop in profits for its fiscal fourth quarter and warned that economic troubles in the U.S. will likely mean lower IT budgets, smaller deals and a first-quarter loss for the company.

Sun said in its earnings report for the fourth quarter, which ended June 30, that net income totaled $88 million, compared to $329 million in the same period a year ago. Revenue came in at $3.78 billion for the quarter, down 1.4% from the year-earlier level of $3.84 billion.

The Q4 results were in line with preliminary numbers that Sun announced two weeks ago. And discounting restructuring charges and other nonoperating expenses and gains, Sun's income amounted to $275 million — still off from the corresponding figure in the fourth quarter a year ago, but higher than financial analysts had expected.

But about 40% of Sun's revenue comes from U.S.-based companies, primarily in the telecommunications, financial services and government sectors. Michael Lehman, Sun's chief financial officer, said during a conference call today that all of those market segments have been affected by the current economic difficulties in the U.S. He added that Sun expects to report a net loss in the current quarter, with revenue dropping slightly on a year-to-year basis.

Sun CEO Jonathan Schwartz said on the conference call that additional bailouts of financial institutions in the U.S. could further affect demand for IT products. Instead of $100 million purchases by customers, Schwartz said he expects to see deals in increments as low as $50,000 in the months ahead.

Sun, which said in May that it planned to lay off 7% of its workers, didn't announce any new job cuts today. But Lehman said that the company is still reducing its head count and will drop to 33,000 workers by the end of fiscal 2009, down from 34,900 employees as of the end of June.

One of the high points for Sun has been sales of servers based on the Niagara versions of its UltraSparc processor. Schwartz said that those systems continued to show strong growth in the fourth quarter and that Niagara and Sun's Open Storage products "really represent the future of how our company is being rebuilt."

For fiscal 2008 as a whole, Sun's revenue increased just one-tenth of a percent, to $13.88 billion. Net income was $403 million for the full year, down from $473 million in fiscal 2007.

Copyright © 2008 IDG Communications, Inc.

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