Sun Microsystems Reports Results for First Quarter Fiscal Year 2007

Revenue Growth and Strong Gross Margin Affirm Sun's Business Strategy and Focus on Innovation

SANTA CLARA, Calif., Oct. 26 /PRNewswire-FirstCall/ -- Sun Microsystems, Inc. (NASDAQ: SUNW) reported results today for its fiscal first quarter, which ended October 1, 2006.

Revenues for the first quarter of fiscal 2007 were $3.189 billion, an increase of 17 percent as compared with $2.726 billion for the first quarter of fiscal 2006. Year over year revenue increase resulted from both acquisitions and increasing acceptance of the Solaris(TM) 10 Operating System, as well as growth in the services business. Computer Systems Products revenues increased 15 percent year over year, the third consecutive quarter of year over year revenue increase.

Net loss for the first quarter of fiscal 2007 on a GAAP basis was $56 million or a net loss of ($0.02) per share, as compared with a net loss of $123 million, or net loss of ($0.04) per share, for the first quarter of fiscal 2006.

GAAP net loss for the first quarter of fiscal 2007 included: $21 million of restructuring and related impairment of asset charges and a $7 million benefit for related tax effects, $58 million of stock-based compensation charges and $79 million of intangible asset amortization relating to recent acquisitions. The net impact of these four items was approximately ($0.04) per share.

Cash generated from operations for the first quarter was $157 million, and cash and marketable debt securities balance at the end of the quarter was $4.671 billion.

"It's great to grow faster than the competition, maintain strong gross margins and see continued adoption of Solaris on HP, Dell and IBM computers," said Jonathan Schwartz, CEO of Sun Microsystems. "Customers across the world are turning to Sun as the safe choice for open source innovation, for industry leading identity and security management platforms and for the most eco-responsible infrastructure to power the network."

Sun has scheduled a conference call today to discuss its financial results for Q1 fiscal year 2007 at 1:30 p.m. (PT), which is being broadcast live at www.sun.com/investors.

About Sun Microsystems, Inc.

A singular vision -- "The Network Is The Computer(TM)" -- guides Sun in the development of technologies that power the world's most important markets. Sun's philosophy of sharing innovation and building communities is at the forefront of the next wave of computing: the Participation Age. Sun can be found in more than 100 countries and on the Web at http://sun.com .

To supplement Sun's consolidated financial statements presented in accordance with GAAP, Sun provides non-GAAP net income (loss) and non-GAAP net income (loss) per share data. The presentation of these non-GAAP financial measures should be considered in addition to Sun's GAAP results and is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

Sun's management believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain charges, gains and tax effects that may not be indicative of Sun's core business operating results. Sun believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing Sun's performance. These non-GAAP financial measures also facilitate comparisons to Sun's historical performance and its competitors' operating results. Sun includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. Non-GAAP measures are reconciled to comparable GAAP measures in the table entitled "Non-GAAP Calculation of Net Income (Loss) Excluding Special Items " following the text of this press release.

NOTE: Sun, Sun Microsystems, the Sun logo, Solaris, and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and other countries.

Contact: Bret Schaefer, +1-650-786-0123, or Email Contact, or Kathy Tom Engle, +1-415-294-4368, or Email Contact.


                              SUN MICROSYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
                     (in millions, except per share amounts)


                                                       Three Months Ended
                                                     October 1,  September 25,
                                                       2006           2005

    Net revenues:
     Products                                         $1,959         $1,704
     Services                                          1,230          1,022
       Total net revenues                              3,189          2,726
    Cost of sales:
     Cost of sales-products (including
      stock-based compensation expense
      of $3 and $2)(1)                                 1,123            966
     Cost of sales-services (including
      stock-based compensation expense
      of $8 and $7)(1)                                   678            558
       Total cost of sales                             1,801          1,524
         Gross margin                                  1,388          1,202
    Operating expenses:
     Research and development (including
          stock-based  compensation  expense
            of  $18  and  $17)(1)                                                                  473                        439
          Selling,  general  and  administrative
            (including  stock-based  compensation
            expense  of  $29  and  $24)(1)                                                  958                        828
          Restructuring  and  related  impairment
            of  long-lived  assets                                                                21                          12
          Purchased  in-process  research  and  development                  -                          60
          Total  operating  expenses                                                    1,452                    1,339
              Operating  loss                                                                        (64)                    (137)
        Gain  on  equity  investments,  net                                                -                          13
        Interest  and  other  income,  net                                                42                          44
        Loss  before  income  taxes                                                          (22)                      (80)
        Provision  for  income  taxes                                                        34                          43
        Net  loss                                                                                        $(56)                  $(123)

        Net  loss  per  common  share-
          basic  and  diluted                                                                $(0.02)                $(0.04)
        Shares  used  in  the  calculation  of
          net  loss  per  common  share-
          basic  and  diluted                                                                  3,497                    3,407

        (1)  For  the  three  months  ended  October  1,  2006  and  September  25,  2005,
                respectively.



                                                            SUN  MICROSYSTEMS,  INC.
                                            CONDENSED  CONSOLIDATED  BALANCE  SHEETS
                                                                    (in  millions)


                                                                                                      October  1,                  June  30,
                                                                                                          2006                              2006*
                                                                                                    (unaudited)

        ASSETS
        Current  assets:
                          Cash  and  cash  equivalents                            $3,362                          $3,569
                          Short-term  marketable  debt
                            securities                                                              609                                496
                          Accounts  receivable,  net                                2,036                            2,702
                          Inventories                                                              584                                540
                          Deferred  and  prepaid  tax
                            assets                                                                      214                                209
                          Prepaid  expenses  and  other
                            current  assets                                                      747                                757
                                                  Total  current
                                                    assets                                          7,552                            8,273

        Property,  plant  and  equipment,  net                              1,583                            1,812
        Long-term  marketable  debt  securities                              700                                783
        Goodwill                                                                                  2,566                            2,610
        Other  acquisition-related  intangible
          assets,  net                                                                              848                                929
        Other  non-current  assets,  net                                            645                                675
                                                                                                      $13,894                        $15,082
        LIABILITIES  AND  STOCKHOLDERS'  EQUITY
        Current  liabilities:
                          Current  portion  of  long-term
                            debt  and  short-term
                            borrowings                                                                $2                              $503
                          Accounts  payable                                                1,292                            1,446
                          Accrued  payroll-related
                            liabilities                                                            661                                777
                          Accrued  liabilities  and
                            other                                                                    1,063                            1,190
                          Deferred  revenues                                              1,695                            1,988
                          Warranty  reserve                                                    244                                261
                                                    Total  current
                                                      liabilities                              4,957                            6,165

        Long-term  debt                                                                          582                                575
        Long-term  deferred  revenues                                                558                                506
        Other  non-current  obligations                                        1,388                            1,492
        Total  stockholders'  equity                                              6,409                            6,344
                                                                                                      $13,894                        $15,082

        *  Derived  from  audited  financial  statements


                                                          SUN  MICROSYSTEMS,  INC.
                                  CONDENSED  CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
                                                        (unaudited,  in  millions)


                                                                                                                Three  Months  Ended
                                                                                                        October  1,      September  25,
                                                                                                            2006                            2005


        Cash  flows  from  operating  activities:
        Net  loss                                                                                    $(56)                        $(123)
            Adjustments  to  reconcile  net  loss  to
              net  cash  provided  by  operating  activities:
            Depreciation  and  amortization                                        123                              143
            Amortization  of  other  acquisition
              related  intangible  assets                                                81                                46
            Deferred  taxes                                                                        (3)                                -
            Impairment  of  assets                                                              8                                  -
            Gain  on  investments,  net                                                      -                              (13)
            Stock-based  compensation  expense                                    58                                50
            Purchased  in-process  research  and
              development                                                                              -                                60
            Changes  in  operating  assets  and
              liabilities:
                  Accounts  receivable,  net                                            672                              449
                  Inventories                                                                      (71)                              67
                  Prepaid  and  other
                    assets                                                                                36                              203
                  Accounts  payable                                                          (151)                          (174)
                  Other  liabilities                                                        (540)                          (484)
        Net  cash  provided  by  operating
          activities                                                                                157                              224
        Cash  flows  from  investing  activities:
            Purchases  of  marketable  debt
              securities                                                                          (675)                          (454)
            Proceeds  from  sales  of  marketable
              debt  securities                                                                  515                          2,818
            Proceeds  from  maturities  of
              marketable  debt  securities                                            136                                75
            Proceeds  from  sales  of  equity
              investments,  net                                                                    7                                  9
            Proceeds  from  sale  (purchases)  of
              property,  plant  and  equipment,  net                            160                              (48)
            Acquisition  of  spare  parts  and  other
              assets                                                                                    (34)                            (20)
            Payments  for  acquisitions,  net  of
              cash  acquired                                                                          -                        (3,150)
        Net  cash  provided  by  (used  in)
          investing  activities                                                            109                            (770)
        Cash  flows  from  financing  activities:
            Proceeds  from  issuance  of  common
              stock,  net                                                                              27                                  3
            Principal  payments  on  borrowings  and
              other  obligations                                                            (500)                                -
        Net  cash  provided  by  (used  in)
          financing  activities                                                          (473)                                3
        Net  decrease  in  cash  and  cash
          equivalents                                                                            (207)                          (543)
        Cash  and  cash  equivalents,  beginning
          of  period                                                                              3,569                          2,051
        Cash  and  cash  equivalents,  end  of
          period                                                                                  $3,362                        $1,508


                                                          SUN  MICROSYSTEMS,  INC.
                NON-GAAP  CALCULATION  OF  NET  INCOME  (LOSS)  EXCLUDING  SPECIAL  ITEMS
                                                                      (unaudited)
                                          (in  millions,  except  per  share  amounts)


                                                                                                              Three  Months  Ended
                                                                                                        October  1,      September  25,
                                                                                                            2006                            2005

        Calculation  of  net  loss  excluding
          special  items:
                    Net  loss*,  **                                                              $(56)                        $(123)
                    Restructuring  and  related
                      impairment  of  long-lived
                      assets                                                                              21                                12
              Purchased  in-process  research  and
                development                                                                            -                                60
                    Gain  on  equity  investments,  net                                -                              (13)
                    Related  tax
                      effects.                                                                          (7)                              (4)
        Net  loss  excluding  special
          items                                                                                        $(42)                          $(68)
        Net  loss  excluding  special  items  per
          common  share  --  basic  and  diluted                            $(0.01)                      $(0.02)

        Shares  used  in  the  calculation  of  net
          loss  excluding  special  items  per
          common  share  --  basic  and  diluted                              3,497                          3,407


            *    Net  loss  for  the  three  months  ended  October  1,  2006  and  September
                  25,  2005  included  $58  million  and  $50  million  of  stock-based
                  compensation  expense  or  approximately  $0.02  per  share  and  $0.01  per
                  share,  respectively.
            **  Net  loss  for  the  three  months  ended  October  1,  2006  and  September
                  25,  2005  included  $79  million  and  $122  million  of  purchase  price
                  accounting  adjustments  and  intangible  asset  amortization  relating  to
                  our  fiscal  2006  acquisitions  or  approximately  $0.02  per  share  and
                  $0.04  per  share,  respectively.

 

Web site: http://sun.com//




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