Sun's quarterly profit plummets 73%

Paging the 1990's

More Videos

• Airline stocks drop as oil soars
• Manufacturing weakness continues - survey
• Fannie, Freddie: Plunge then rebound
• Jobless claims ease for 2nd straight week
• Is college still worth the price?

Issue #1: America's Money - Everyday on CNN

SAN FRANCISCO (AP) -- Sun Microsystems Inc.'s profit plunged 73% in the most recent quarter as slumping sales to big U.S. companies and restructuring charges weighed on the server and software maker.

The Santa Clara, Calif.-based company also revealed plans Friday to expand its stock buyback program by $1 billion, a sign Sun believes its shares, which have fallen by 50% over the last nine months, are undervalued and poised to rebound.

Wall Street didn't share that optimism.

Sun's shares sank 13% on the company's worse-than-expected guidance, which indicated that the pressures that hurt Sun in the April-June period, its fiscal fourth quarter, are bleeding into the current quarter.

Sun, the world's fourth-largest server maker, said before the market opened that it expects a "slight" sales decline in the fiscal first quarter, which ends in September, and indicated it likely wouldn't turn a profit. Analysts surveyed by Thomson Financial were expecting flat sales and a profit of 11 cents per share in this quarter.

Goldman Sachs analysts David Bailey and Min Park said in a note to clients that Sun's results supply "another piece of evidence that the problems the company faces have no short-term fixes, and we would continue to avoid the shares."

The disappointing forecast represents the latest setback for a company that until recently was riding a sudden run of profitability: The latest quarter was Sun's sixth profitable quarter out of the last seven periods.

That marked a turnaround from the more than $5 billion in losses Sun racked up after the dot-com meltdown obliterated demand for many of its expensive servers. Sun turned the corner with intensive cost-cutting, such as by slashing 6,500 jobs over the past two years.

Investors still have had muted expectations. Analysts lowered their estimates in July when Sun announced early that its fourth-quarter sales and profit margins would be below the company's previous guidance.

Sun blamed weakness in the U.S. economy, which has caused some of its biggest customers to cut spending, and the sale of fewer higher-end servers, which carry better profit margins. Sun faces intense competition in that market from IBM Corp. (IBM, Fortune 500) and Hewlett-Packard Co. (HPQ, Fortune 500)

Sun earned $88 million, or 11 cents per share, in the latest quarter. That compares with $329 million, or 36 cents per share, in the year-ago period.

Excluding one-time charges, Sun earned 35 cents per share. Analysts surveyed by Thomson Financial were expecting profit of 25 cents per share, but some include charges that Sun is excluding, so the numbers aren't directly comparable.

Sales were $3.78 billion, a 1% decline from $3.84 billion last year. That matched analyst estimates.

For the full 2008 fiscal year, Sun earned $403 million on $13.9 billion in sales.

Investors remain wary of Sun's prospects considering the U.S. market makes up about 40% of its sales. They're also concerned because much of Sun's gains have come from its cost-cutting, which might not be sustainable.

Those fears have been reflected in Sun's stock, which has fallen steadily since the company's 1-for-4 reverse stock split in November. The maneuver was supposed to improve Sun's image, but instead seemed like a sign of trouble.

Sun (JAVA, Fortune 500) shares were down $1.31 to $9.30 in Friday afternoon trading.

Another worrisome figure for Sun was its gross profit margin, which declined 2.9 points to 44.3 percent in the latest quarter. For all of fiscal 2008, however, the figure improved by 1.3 percentage points to 46.5 percent.

Some view Sun's stock as attractive because of its sharp decline.

Wachovia analyst David Wong said it might take a while for the shares to get any kind of big boost, but in the meantime, "Sun continues to restructure and focus on cost cutting, which we think will result in improved profitability when demand improves."