On Thursday Sun Microsystems Inc. missed analysts' expectations in its first fiscal quarter, returning a profit of $163 million, or 41 cents per share, on record revenues of slightly more than $2 billion.
First Call Consensus, which originally expected the Mountain View, Calif., firm to post a profit of 67 cents per share, recently revised the estimate downward to 44 cents per share.
While Sun's revenues were up 13 percent from the same quarter a year ago, analysts weren't impressed with the bottom line.
"It's good news and bad news," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "They're making inroads in their server and microprocessor markets, but they aren't getting the kinds of margins most of us had hoped for."
Sun's stock, along with most of the technology issues, took a beating Thursday, closing down $3.38 per share to $42.25 before the earnings were announced.
Earnings per share were up 28 percent from that quarter a year ago, excluding a onetime $52.2 million charge for the acquisitions of Diba Inc. and Integrity Arts Inc. Due to the structure of those transactions, Sun also incurred a onetime charge of $19.9 million to its income tax provision.
Including the charges, Sun managed to post a profit of $108.4 million, or 32 cents per share.
"We are pleased with the overall results of the quarter," said chief executive Scott McNealy in a prepared release. "We feel well positioned for the future."
Mazzucchelli said new products such as the UltraTM EnterpriseTM 450 workgroup server and the UltraSPARCTM III microprocessor family should generate higher sales and better margins in subsequent quarters.
"There's no question that Sun is the first company corporate customers look to as they develop their intranets," he said. "As long as they can stay on the leading edge, regardless of what Microsoft does they'll improve both their top and bottom lines."
Analysts said unusually weak sales in Europe, combined with a strong U.S. dollar, conspired to lower Sun's net income.
Bill Gorman, an analyst at PNC Institutional Investor Services, said he expects the stock to drop even further tomorrow.
"This week, with Intel and now Sun, has been a good educational experience for us all," he said. "Lately investors are questioning the fundamentals of tech stocks, and flat or slightly down earnings sets off all kinds of bells."