Sun's New Products Could Mean Renewed Profitability

Coming off its first unprofitable quarter in 12 years, Sun warns that it expects to lose money again this quarter, but that pending products could help it reverse that trend in subsequent quarters.
A red-carpet treatment for its pending products may be the key to helping Sun Microsystems reverse a developing trend of unprofitability.

Sun CFO Mike Lehman said yesterday, during a conference call with analysts, that he's doubtful the company can reach pre-determined break-even levels for its fiscal second quarter, which ends Sept. 30. Lehman indicated that any chance Sun has for avoiding its second consecutive quarter in the red--or for returning to profitability in the following quarter--is tied to its new product lines.

Sun has generated 80 quotes for its new high-end storage systems, and it has several deals in the pipeline, a sign that it may be developing the traction needed to lift the company from its doldrums, says Lehman. "That clearly is driving momentum for us," he said. "More is better."

Lehman admitted, however, that the promise of pending products may be hampering Sun's current sales efforts, as customers hold off on upgrades while waiting for the introduction of next-generation technologies. He also said that the company's inventory, which has swelled during the economic downturn, may have reached its peak; he expects to see it dwindle for the remainder of fiscal year 2002.

Sun posted its first unprofitable quarter in 12 years when it disclosed results for the quarter ended June 30. At the time, company executives said that $3.7 billion in revenue was needed to break even for the current quarter. Lehman said cost-cutting measures, including the reduction of 500 jobs through attrition and reassignments, probably have lowered that figure, but declined to provide more specifics.

Enterprise Storage Group analyst Steve Duplessie says Sun's struggles are less an indication of the company's shortcomings than they are a reflection of the current economic downturn, combined with the typical August slowdown. "Those two things together make for hell on computers," says Duplessie.

Duplessie says the product that could have the single biggest impact on Sun's near future is its hotly anticipated high-end server line, code named Serengeti. Duplessie says Serengeti's combination of improved performance, lower pricing, and smaller size could hint at a repeat of the success of Sun's Ultra Enterprise server line that was launched in the mid-1990s. He says it may force IT buyers, currently focused on keeping hardware costs down, to loosen their purse strings. Says Duplessie, "It's cool enough that people will go over the edge."

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