Sun Micro Returns To Profitability in Fiscal Second Quarter

Sun Microsystems returned to solid profitability Tuesday after years of red ink, easily exceeding Wall Street's tepid expectations thanks to the growing popularity of its corporate computers and its newest operating system for servers.

The server and software maker also announced that KKR Private Equity Investors would invest $700 million in the company.

Sun, of Santa Clara, Calif., posted a fiscal second-quarter net profit of $126 million, or 3 cents per share, compared with a net loss of $223 million, or 7 cents per share, a year ago.

Excluding special items, including $58 million in stock-based compensation charges and $26 million in restructuring costs, the company earned 4 cents a share for the quarter ended Dec. 31. That's better than the penny-a-share forecast compiled by Thomson Financial.

Revenue rose 7% to $3.57 billion from $3.34 billion.

Sun said the increase in its revenue was due to an uptick of sales in its servers using its Sparc chips, those using Intel-compatible chips, and the acceptance of its Solaris 10 operating system.

"Sun's financial performance this quarter demonstrates that our strategy and discipline are paying off," said Jonathan Schwartz, CEO of Sun Microsystems, in a statement.

The earnings report ends years of losses for Santa Clara-based Sun, one of the highest-flying companies during the 1990s Internet boom. It bled more than $5 billion since 2002, when computer-related spending dried up and lower-cost offerings from competitors encroached on Sun's turf.

Sun shares rose in after-hours trading. Before the report came out, Sun shares nearly 2% percent, to close Tuesday on the Nasdaq Stock Market.

On Monday, Sun said that it would use microprocessors from Intel, the number one chipmaker, and that the two had entered a broad engineering relationship to ensure that Sun's Solaris operating system runs optimally on Intel chips. Sun will continue to buy chips from Intel rival Advanced Micro Devices , the company said.

Sun is known for catering to corporate clients willing to spend liberally on cutting-edge technology - not customers looking for the cheapest possible computer servers and bare-bones consulting services. That strategy proved lucrative when companies are eager to spend cash -but once the economy sours, expensive computer servers and the most advanced technology are often seen as discretionary, even profligate.

To correct that reputation, Sun went public last week with an ambitious initiative to get startups to buy Sun's Solaris operating system instead of Linux, widely considered the low-cost choice for penny-pinching startups. The campaign is aimed in particular at entrepreneurs and computer programmers in developing countries.

Meanwhile, Sun's deal with KKR, the public fund of private equity firm Kohlberg Kravis Roberts, comes in the form of a $700 million private placement.

KKR's investment will be comprised of $350 million in convertible senior notes due in 2012, and $350 million in convertible senior notes due in 2014. A nominee of KKR will be presented for appointment to the Sun board upon the close of the transaction or shortly after, Sun said.

The 2012 and 2014 notes will be convertible, during specific periods, at $7.21 a share.

"This investment is an important validation of our strategy and competitive assets, and reflects endorsements from key customers, along with improving financial performance and market share gains," said Schwartz in a statement.

Shares of Sun rose 29% in 2006, compared with an 11% increase in the Merrill Lynch Technology 100 Index, of which Sun is a member, in the same time period.