Sun Q4 revenue down, but tax gain helps income

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

Fourth-quarter revenue was $2.975 billion, down 4.3 percent 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 $121 million, which included a net tax benefit of $190 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 $0.04.

The Santa Clara, Calif., company said its net income on a non-GAAP basis was $200 million, which excludes an $84 million restructuring charge and a related tax benefit. This works out to earnings per share of $0.06. Analysts surveyed by Thomson First Call had expected Sun to record earnings per share of $0.01, but it was not immediately clear whether those estimates were made with the tax benefits and restructuring charges in mind.

The $190 million tax benefit was derived from the resolution of tax audits in Sun's favor by the U.S. Internal Revenue Service as well as foreign tax collectors, said Steve McGowan, Sun's chief financial officer, on a conference call following Sun's earnings announcement. It is a one-time gain, he said.

Without the tax benefit, Sun recorded a loss of $69 million, and without interest income the company posted an operating loss of $100 million.

Sun's overall product revenue fell during the fourth quarter, but total server shipments were up 9 percent and shipments of servers based on x86 processors were up 105 percent, 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 Inc.'s Opteron processor and Sun's Sparc processors. About 65 percent of Sun's server shipments during its 2005 fiscal year were servers with one to eight processors, while only 45 percent of the company's products fitted that description in 2001.

Customers are just starting to evaluate the next-generation of Sun's Opteron servers, code-named Galaxy, said Sun Chairman and Chief Executive Officer Scott McNealy on the conference call. Sun is expected to formally announce those products relatively soon, but McNealy declined to comment on when they would be available.

Sun recorded revenue of $11.1 billion for its 2005 fiscal year, down 1 percent compared to last year's revenue of $11.2 billion. Sun's net loss for the year was $11 million, an improvement over last year's $388 million net loss.

The company continued to generate cash flow from operations, one of McNealy's favorite measures of company performance. "We are going to continue to be a cash company. Accounting continues to grow more complicated, but cash is simple," he said on the conference call.

But Sun actually ended its 2005 fiscal year with less cash than the previous year, a net decrease of $90 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, said Jonathan Schwartz, president and chief operating officer. Instead, those deals were pushed into the first quarter, such as the deal Sun plans to announce Wednesday with General Motors Corp. (GM), he said.

GM will 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 Corp. is expected to close just after StorageTek holds a shareholder meeting to approve the deal on Aug. 30, McGowan said.

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

NOTE:
Update includes CFO comments on tax benefits in graph four and five, details on server business in paragraphs six through eight, details on cash balances in paragraphs 10 and 11, comments on software business in paragraphs 12 and 13, and comments on acquisitions in paragraphs 14 and 15.