Sun revenue down in Q4, but tax windfall helps income

Sun's quarterly revenue continued to fall in the fourth quarter, but the company met analysts' revenue expectations.

Sun Microsystems' quarterly revenue has continued its decline in the fourth quarter, but the company has posted a profit on a one-time tax benefit.

Fourth-quarter revenue was $US2.975 billion, down 4.3 per cent compared to last year's fourth-quarter revenue of $3.1 billion but in line with analyst expectations as compiled by Thomson First Call. Net income was $US121 million, which included a net tax benefit of $US190 million that was the result of adjustments to a reserve account as well as a tax expense on foreign earnings. Earnings per share according to GAAP (generally accepted accounting principles) was $US0.04.

Sun said its net income on a non-GAAP basis was $US200 million, which excluded an $US84 million restructuring charge and a related tax benefit. This works out to earnings per share of $US0.06. Analysts surveyed by Thomson First Call had expected Sun to record earnings per share of $US0.01, but it was not immediately clear whether those estimates were made with the tax benefits and restructuring charges in mind.

The $US190 million tax benefit was derived from the resolution of tax audits in Sun's favor by the US Internal Revenue Service as well as foreign tax collectors, Sun's chief financial officer, Steve McGowan, said.

It was a one-time gain, he said.

Without the tax benefit, Sun recorded a loss of $US69 million, and without interest income the company posted an operating loss of $US100 million. Sun's overall product revenue fell during the fourth quarter, but total server shipments were up 9 per cent and shipments of servers based on x86 processors were up 105 per cent, McGowan said.

Sun's product line is in the midst of a transformation from mostly high-end multiprocessor servers to a more diversified lineup of servers based on Advanced Micro Devices's Opteron processor and Sun's Sparc processors. About 65 per cent of Sun's server shipments during its 2005 fiscal year were servers with one to eight processors, while only 45 per cent of the company's products fitted that description in 2001.

Customers were just starting to evaluate the next-generation of Sun's Opteron servers, code-named Galaxy, Sun chairman and chief executive officer, Scott McNealy, said.

Sun is expected to formally announce those products relatively soon, but McNealy declined to comment on when they would be available.

It recorded revenue of $US11.1 billion for its 2005 fiscal year, down 1 per cent compared to last year's revenue of $US11.2 billion. Sun's net loss for the year was $US11 million, an improvement over last year's $US388 million net loss.

The company continued to generate cash flow from operations, one of McNealy's favourite measures of company performance.

"We are going to continue to be a cash company," he said. "Accounting continues to grow more complicated, but cash is simple."

But Sun actually ended its 2005 fiscal year with less cash than the previous year, a net decrease of $US90 million.

The company's software business made progress during the quarter but did not close as many deals as it would have liked for its Java Enterprise System (JES) software, president and chief operating officer, Jonathan Schwartz, said.

Instead, those deals were pushed into the first quarter, such as the deal Sun planned to announce shortly with General Motors (GM), he said.

GM would use JES to manage its software development and application deployment on Solaris servers, a big win for the company, Schwartz said.

Sun's acquisition of Storage Technology was expected to close just after StorageTek held a shareholder meeting to approve the deal on August 30, McGowan said.

Sun would probably acquire additional companies in upcoming quarters, McNealy said. "We do not believe we have used up our capacity to be a consolidator," he said.

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Tom Krazit

IDG News Service
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