Sun Charts 4th Profitable Quarter, Sets Sights on Growth

Sun Microsystems (Nasdaq: JAVA) announced modest increases in revenue and profit for its first quarter of 2008 and said continuing the growth remains its "top priority" for the rest of the year.

The company, now in its 25th year, reported first-quarter net income of US$89 million, which equates to 3 cents per share. During the first quarter a year ago, Sun suffered a net loss of $56 million.

Revenue for Q1 of 2008 was about $3.22 billion, a 1 percent increase over revenue from the first quarter of 2007. Total gross margin as a percent of revenues came in at 48.5 percent, an increase of 5 percentage points compared with the first quarter of last year.

The Q1 net income figures include $113 million in restructuring costs. Had they not occurred, Sun said its profit would have been 3 cents per share higher.

The Schwartz Touch

The growth wasn't quite strong enough to satisfy investors and Wall Street analysts. They'd been hoping for sales during the quarter of $3.27 billion. Sun's stock dropped 55 cents to close at $5.16 on Tuesday.

However, the quarter was the fourth in a row where Sun posted a profit and marked the first full-year profit in years. The company's gross margins hit a seven-year high of 48.5 percent, Sun CEO Jonathan Schwartz noted.

They came about a year and a half after Sun founder and former CEO Scott McNealy turned over the reins to Schwartz, who softened the company's famously tough-nosed attitude to competitors, particularly Microsoft (Nasdaq: MSFT). The company has entered partnerships with Microsoft and IBM (NYSE: IBM) that involve operating system interoperability.

Pink Slips and Black Ink

"We showed continued execution and operating discipline and delivered a very solid first quarter with continued revenue growth, profitability and gross margin expansion," Schwartz said.

Schwartz cited Sun's strength in high-end systems, growth in its subscription-based identity management software and expanded sales of its open source Solaris 10 Operating System and virtualization products.

"Growth remains our top priority for fiscal 2008 as we look to capitalize on our UltraSPARC T2 servers," said Schwartz.

There has been a human toll behind much of the company's turnaround. Schwartz went on a cost-cutting spree, slashing about 4,000 jobs in 17 months with more to come.

Sun's progress is "somewhat encouraging," but not exactly worthy of a parade, said Charles King, principal analyst at Pund-IT.

"They've shown that they can string together four quarters of black ink, much of it driven by cost-cutting and layoffs, but are not demonstrating an ability to grow revenues or market share," King told LinuxInsider. "Coming after years of sputtering, inconsistent results, this quarter's numbers should be considered a positive. However, they look anemic in comparison to its competitors' strong showings this quarter."

Work in Progress

To a large extent, Sun continues to re-invent itself, said technology analyst Jack Gold, principal analyst at J. Gold Associates.

"I think Sun's biggest challenge going forward is to define who they are," he told LinuxInsider. "They were always known as a Unix server company (with Solaris) and although they had other business lines, that was there core. This is an area that is in turmoil, and companies are no longer bound to only buy proprietary Solaris boxes."

Linux "runs on virtually any box, not just Sun," said Gold, adding that the company needs to open up to other operating systems.

Doing so has its risks, he noted, since it puts them in head-to-head competition with Dell (Nasdaq: DELL), HP (NYSE: HPQ), IBM and others. "It's hard to charge premium prices in a commodity market," said Gold. "So where does Sun go from here to avoid being just another commodity box company? That is their biggest challenge."

Sun "seems to be a company still in transition," King said. The deals announced with IBM, Microsoft and others "should help out Sun over time, but successful partnerships are adjuncts to a strong overall strategy , not a replacement for it," he said.