Sun Microsystems' Net Rises 15%,
Boosted by a 13% Gain in Sales
By LEE GOMES
Staff Reporter of THE WALL STREET JOURNAL
Sun Microsystems Inc. overcame sales weakness in Asia to top expectations for fiscal fourth-quarter profit, and the company continued to grow faster than most rival computer makers.
The Palo Alto, Calif., company said net income for the quarter ended June 30 rose 15% to $273 million, or 69 cents a diluted share, from $237.2 million, or 61 cents a share, a year earlier. Excluding a one-time acquisition-related expense, earnings were 73 cents a share, two cents higher than the First Call consensus. Revenue was $2.88 billion, up 13% from $2.54 billion a year ago.
Company Profile: Sun Microsystems
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Sun Microsystems Software Eases Sharing of Devices Across Network (July 15)
Not long ago, that sales growth would have been disappointing for Sun, which regularly grew at more than 20% per quarter. But the figure is above the 11% to 12% increase that many analysts had predicted, and would have been five percentage points higher without the effects of Asia's economic crisis, the company said.
Boost for the Stock
In addition, it is also well above the single-digit sales boosts being recorded by many of Sun's competitors. "Even though its growth may be muted, Sun is still outperforming the competition," said Steve Milunovich of Merrill Lynch.
Even though Sun's stock has risen sharply in the last few days, the news helped send it up even higher in after-hours trading, to $51. In earlier Nasdaq stock market trading, Sun shares closed at $49.9375, up 56.25 cents.
Michael Lehman, Sun's chief financial officer, said sales declines in Asia were handily offset by a 26% year-over-year increase in European sales and a 12% rise in the U.S. In addition, domestic sales were stronger than that latter figure might suggest, said Mr. Lehman, because the year-earlier quarter was an exceptionally strong one. Compared with the preceding quarter, Sun's U.S. sales rose 23%.
Strength in Servers
As such, the quarter is another sign of Sun's continued ability to successfully stand apart from the dominant computing standard based on Intel Corp. chips and Microsoft Corp. operating systems. Analysts said that Sun is in an even stronger short-term position now than it was three months ago, owing to the fact that both Intel and Microsoft have announced delays in next-generation products.
While Sun has been making headlines with software offerings, like its Java programming language and the "Jini" network connection system it announced this week, Sun makes nearly all of its money by selling computers, most often to big businesses. Sun said that in the recent quarter, it had robust sales across all of its product lines. But analysts said that most of Sun's strength comes from its sale of high end business computers known as servers, which are now its largest product category, accounting for 35% of total sales.
The company said it expected quarterly year-over-year sales increases to continue in the 13% to 15% range for the next two quarters, but to return to the high teens next year.
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Microsoft Net Income Rises 28%,
Beating Estimates on Wall Street
By DAVID BANK
Staff Reporter of THE WALL STREET JOURNAL
Microsoft Corp.'s net income for its fiscal fourth quarter rose 28%, topping Wall Street estimates and demonstrating the powerful momentum of its basic product lines, even without major new releases.
For the quarter ended June 30, Microsoft reported net of $1.36 billion, or 50 cents a diluted share, compared with $1.06 billion, or 40 cents a diluted share, in the year-earlier quarter. Revenue surged 26% to $4 billion from $3.18 billion the year earlier.
Company Profile: Microsoft
The Redmond, Wash., software giant is in a period of slower growth that began in its fiscal third quarter and is expected to last at least another year, when major new products, such as Office 2000 and Windows NT 5.0, will provide big boosts to the company's revenue and earnings. In the most recent two quarters, Microsoft's earnings have grown about 26% from the year before, about half the torrid 51% pace in its first half. Analysts expect Microsoft's growth rate to fall to about 20% in the current fiscal year.
Analysts Often Confounded
But Microsoft has repeatedly confounded analysts by posting higher-than-expected earnings. Office 97, which will be replaced next year, continued to show strong sales in the just-ended period. And Windows 98, which was earlier considered to represent only a minor improvement over Windows 95, is off to a strong sales start, with retail sales of more than one million copies. Because of the June 25 release date, Microsoft recognized only $150 million in revenue from Windows 98 in the quarter.
"For a period that was meant to represent a trough in earnings growth in the absence of new products and in advance of any meaningful contribution from Windows 98, we think these results are exceptional," said Jonathan Cohen, an analyst with Merrill Lynch & Co. in New York. "This is a company at the peak of its powers."
Stock Price Drops After Hours
Microsoft's per-share earnings of 50 cents exceeded the consensus analyst forecast of 48 cents, but matched the so-called whisper number, or informal expectation among analysts. The company's stock closed unchanged at $117.375 in Nasdaq Stock Market trading Thursday, and fell to $116 in after-hours trading, according to Instinet.
The numbers behind the numbers, however, show Microsoft's financial strength is growing. Its cash hoard rose 13% to $13.9 billion. The "unearned revenue" account, which represents sales that will be accounted for in future income statements, swelled 17% to $2.9 billion. And Microsoft's gross profit margin expanded even further to 92.1%, while its net margin stayed at a sky-high 33.8%.
The performance was aided by better-than-expected sales of personal computers, said Greg Maffei, Microsoft's chief financial officer. Sales to PC makers of Windows 95, Windows 98 and Windows NT Workstation showed strong increases from last year, he said. But sales of the server version of Windows NT and the BackOffice group of business software products, which are crucial to Microsoft's goal of penetrating the market for corporate-computing systems, slowed from the rapid growth of recent quarters, he said.
Mr. Maffei said revenue in the current quarter will fall by about $200 million, but that lower expenses will result in a decline in net of only one cent a share, to about 49 cents a share.
Rick Sherlund, an analyst with Goldman, Sachs & Co. in New York, said the latest results, while strong, weren't likely to propel more major increases in Microsoft's share price, which already has increased more than 40% since early May. "These numbers look pretty good, but it's a lot slower than we are accustomed to," Mr. Sherlund said. "It's a relative dry spell in terms of new products."
Antitrust Trial Looms
Mr. Sherlund said Microsoft has come to represent a haven among technology stocks, despite a looming trial on antitrust charges brought by the Justice Department. "The stock has developed an immunity to the kinds of news that would have caused a lot of investor apprehension previously," he said. "The Justice Department action has been very much discounted by Wall Street, and the slowing earnings momentum is not of very much concern to investors. The reason is: What else are you going to own?"
Indeed, investors have appeared willing to look past Microsoft's slower near-term growth because of the company's perceived ability to sustain its growth over time. Microsoft's future growth is likely to come in several stages, starting with sales of server software for business systems, such as databases and messaging, followed by growth in the market for consumer electronics, such as television set-top boxes. "I don't think there's a big change in the long-term trend," said John Porter of Fidelity Investments. "Microsoft is a blue-chip company, not a tech company."
Mr. Maffei took advantage of a drop in the price of Microsoft's shares during the quarter to buy back 10.1 million shares at an average price of $85.38 apiece.
For the full year, Microsoft reported revenue of $14.48 billion, up 28% from $11.36 billion a year earlier. Annual earnings increased 34% to $4.49 billion, or $1.67 a diluted share, from $3.45 billion, or $1.32 a diluted share.
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