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Financial Update

* Sun Likely To Repeat Money-Losing Quarter
Sun Microsystems' only chance--and it's a slim one--of avoiding a second straight money-losing quarter is a big sales rally this month. But CFO Mike Lehman doesn't expect one. Lehman said last week he's doubtful Sun (SUNW--Nasdaq) can reach the $3.7 billion revenue threshold it set for breaking even in its fiscal second quarter, which ends Sept. 30.

On the plus side, Sun has given price quotes to 80 potential buyers for its new high-end storage system, and it has several deals in the sales pipeline, Lehman says. "That clearly is driving momentum for us," he says. However, the company's sales are lagging behind expectations in Japan and Europe.

Lehman also concedes that the expectation of new products may be hampering current sales efforts, as customers hold off on upgrades while waiting for the introduction of next-generation technologies. The company's inventory has swelled during the economic downturn; Lehman expects to see it shrink during the rest of fiscal year 2002.

Sun posted its first unprofitable quarter in 12 years with the release of results for its first quarter, ended June 30, at which time it also estimated its break-even mark. Lehman says cost-cutting measures, including the elimination of 500 jobs through attrition and reassignments, have probably lowered that break-even figure, but he declines to set a new number.

--Tony Kontzer ([email protected])

Loudcloud Sees Better Days Ahead
Struggling Web-hosting company Loudcloud Inc. says the worst is over after reporting last week that it cut costs and narrowed second-quarter losses. But it hasn't dispelled worries about poor customer acquisition and retention.

Loudcloud (LDCL--Nasdaq) lost $45.8 million on revenue of $14.1 million in the quarter ended July 31, but that number excludes $30.2 million in restructuring costs. It lost $60.3 million on revenue of $11.7 million in the first quarter.

Analysts question whether Loudcloud executives can hit their goal of almost no customer turnover by year's end. Says Morgan Stanley Dean Witter analyst Jeffrey Camp, "Churn is harder to predict and more difficult to manage than they're expecting." Loudcloud booked 19 orders during the quarter, but because it also lost customers, its active client list grew by only one, to 33.

--Alorie Gilbert ([email protected])

PeopleSoft Aims For E-Commerce Markets
PeopleSoft Inc. has bought a content-management software company to help its users manage catalogs online, directly challenging E-commerce platform vendors such as Commerce One Inc. and Ariba Inc. The purchase of Cohera was the second by PeopleSoft (PSFT--Nasdaq) in three months and underscored that the company remains in a growth mode despite the weak software sales market. PeopleSoft earned $47.4 million for the second quarter, three times more than the year-ago quarter. E-commerce applications incorporating the Cohera technology are available now.

Not everyone thinks PeopleSoft is a threat to more established vendors of E-business marketplace platforms. AMR Research analyst Pierre Mitchell considers PeopleSoft's effort fragmented. "It's a work in progress, with some of the pieces in place."

--Antone Gonsalves ([email protected])

VA Linux Tries A New Survival Strategy
VA Linux Systems Inc. can turn a profit selling software instead of Linux-based servers, but it won't start booking revenue from those sales for several more quarters, CEO Larry Augustin says.

VA Linux (LNUX--Nasdaq) in late June exited what had been its main business--selling and installing servers running the Linux operating system. The company couldn't generate new accounts as its dot-com customers went out of business; its stock has gone from a 52-week high of $63.63 to trading below $2 last week.

Now, VA Linux is trying to survive selling software, called SourceForge, for managing software development projects. "We believe we have enough cash to get profitability with this model," Augustin said at last week's LinuxWorld Conference in San Francisco. VA Linux had $82.9 million in cash and marketable securities at the end of its fourth quarter, ended July 28. The company lost $290.1 million during the quarter on sales of $16 million, due to goodwill write-downs and restructuring charges. It predicts its first-quarter net loss will be $10 million to $13 million on sales of $3 million to $4 million.

VA Linux has signed Compaq, Goldman Sachs Group, and Hewlett-Packard for SourceForge Enterprise Edition, but they are deferred contracts. Says Augustin, "People need to realize it's going to take a few quarters to get this whole thing ramped."

--Aaron Ricadela ([email protected])

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