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By | Ashlee Vance 30th July 2007 23:12

Investors stunned by Sun's apparent health

Q4 pumped full of black ink

Shares of Sun Microsystems jumped close to 10 per cent in after-hours trading, as the hardware maker posted strong fourth quarter results. Longtime Sun followers, however, may be less moved by the figures since Sun relied more on cost-cutting than sales to improve its bottom line.

Sun posted fourth quarter revenue of $3.84bn - a figure almost even with last year's revenue of $3.83bn in the same period. But Sun's Q4 net income came in at $329m - a vast improvement over a $301m loss one year earlier. The company was obviously aided by a number of cost-cutting moves, including layoffs, and stronger gross margins.

For the full year, Sun reported a 6.2 per cent rise in revenue to $13.87bn and a profit of $473m, which compares to a $864m loss last year.

"This is a great day for Sun," said CEO Jonathan Schwartz, during a call with analysts.

Sun has been working hard to trim costs by reducing its workforce and by improving its own back-end technology. And the company deserves credit for making the most of these moves and beating analyst expectations on the costs front. The company now seems able to post profits with consistency even during so-so quarters, which is what you want in a turnaround story.

Still, Sun has a lot of questions to answer around its core server line. Server revenue has been stagnant to falling over the past few months.

Schwartz attributed some of the server slowness to virtualization technology, which he claims has caused customers to buy fewer boxes. Over the long haul, this trend should benefit Sun with customers buying larger systems to handle lots of applications in one go, he said.

We're not ready to swallow either side of this story and believe that virtualization will have little impact on overall server purchases. Customers always seem to find a way to consume more boxes when given the chance. In addition, Sun has yet to prove it can outflank HP, IBM, and Dell with virtualization, since they have closer historic ties to VMware.

On the plus side for Sun, sales of its x86 servers rose 39 per cent year-on-year. In addition, its Niagara-based systems saw 225 per cent growth, while sales of its X4500 - aka Thumper - storage boxes reached an annual run rate of $100m. Sun's revamped blades hit an annual sales rate of $55m.

Overall, Sun's fourth quarter product revenue came in at $2.49bn, which compares to $2.52bn in last year's Q4. Services revenue hit $1.34bn - up from $1.30bn.

For the full year, Sun's product revenue grew to $8.77bn from $8.37bn. Services revenue reached $5.1bn from $4.7bn.

Sun declined to provide first quarter revenue guidance but said it expects full fiscal 2008 revenue to rise by "the low to mid single digits." ®

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