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Sun Microsystems Rings Up 3Q Profit

Sun Microsystems Inc. put together its first back-to-back profitable quarters since the dot-com bust, but its shares plunged on fears its core server business is slowing.

The Santa Clara-based company said Tuesday that it swung to a profit in the fiscal third quarter, generating net income was $67 million, or 2 cents per share, for the first three months of the year. That compares with a loss of $217 million, or 6 cents per share, in the same period a year ago.

Excluding one-time charges for restructuring and other expenses, Sun earned a penny per share, matching the average profit expectation from analysts surveyed by Thomson Financial.

However, Sun's stock price plunged more than 6 percent in after-hours trading on a revenue miss that some analysts believe indicates a slowdown in Sun's core server business where the company has been gaining market share.

Sun's revenues for the quarter were $3.28 billion, a slight increase from the $3.18 billion recorded in the year-ago period, but short of the $3.42 billion analysts were expecting.

Management blamed the shortfall on slackening orders in the last few weeks of the quarter, saying it didn't appear Sun was losing ground to competitors, but rather that customers in the U.S. and the United Kingdom were delaying purchases as Sun rolls out new products.

Brent Bracelin, a computer systems and storage analyst with Pacific Crest Securities, said his firm is concerned that Sun's server sales are slowing, indicating weakness in an area that has been Sun's primary growth engine for the past three quarters.

Sun's product revenues, which account for two-thirds of the company's overall sales, were up only slightly from the previous year, at $2.06 billion in the third quarter compared with $2.04 billion in the year-ago period.

The company rang up $1.5 billion in sales of its computer systems products, a meager 2 percent increase over last year and an 8 percent decline from the previous quarter. Support services were up 5 percent year-over-year to $950 million but declined 5 percent from the previous quarter.

It was Sun's second profitable quarter in a row after suffering a lengthy downturn following the dot-com implosion. Sun racked up more than $5 billion in losses through the 2006 fiscal year as IT spending dried up and demand for its high-end products shifted to lower-cost offerings.

Rick Munarriz, senior analyst for media and technology investing at The Motley Fool, said investors were expecting stronger earnings and revenue growth from a company whose stock has risen about 19 percent in the last year. The stock surge has created about $4 billion in additional shareholder wealth.

"You expect to be overwhelmed on both fronts, and Sun obviously didn't deliver on the top line and that's why it's being punished, maybe rightfully so," he said. "But for as much as you're seeing in the after-hours, that's probably as bad as it's going to get. Nobody's going to be ringing Sun's death bell like they were a few years ago."

Before the quarter, Sun was shown rapidly gaining share in the worldwide server market, according to the latest data from research group IDC.

For the last three months of 2006, Sun stole away 1.5 points of overall market share and boosted server revenue growth by 24 percent to $1.47 billion. Sun finished 2006 tied with Dell for third place, behind International Business Machines Corp. and Hewlett-Packard Co.

For the fourth quarter, Sun said it expects revenues to increase sequentially by 15 percent to 18 percent. That's short of analyst estimates that sales would grow by 22 percent to about $4 billion, according to Thomson Financial.

Sun said gross margins for the fourth quarter are expected to be between 42 percent and 44 percent, slightly down from the 44.5 percent gross margin recorded in the third quarter.

"With another quarter of profitability, we're seeing continued progress operationally, strategically and financially, and we remain committed to our fourth quarter goal of at least 4 percent operating profit," Sun Chief Executive Jonathan Schwartz said in a statement.

Sun shares closed up 2 cents at $5.94 during regular-session trading on the Nasdaq Stock Market. After the results were announced, the stock was down 39 cents, or 6.6 percent, in after-hours trading.

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