Sun Microsystems, Inc. (JAVA) reported results for the first quarter of fiscal 2010 in an SEC filing. Lower operating expenses and higher gross margin helped the company lower its first quarter GAAP loss to $120 million, or 16 cents per share from a loss of $1.68 billion or $2.24 per share reported in the year-ago period and beating the Zacks Consensus estimate of a loss of 23 cents per share. 

Earnings on a non-GAAP basis (excluding one-time items) rose to 2 cents per share in the quarter from a net loss of 8 cents per share in the year-ago period. Gross margin improved to 43.4% from 40.2% a year ago. Operating expenses were down 62.3% year over year, as a result of which operating margin improved to -4.5% from -55.2% in the year-ago quarter. 

However, total revenue fell 25% to $2.24 billion, with both Products and Service revenues declining 32.7% and 13.9%, respectively from the year-ago period. Revenue was lower than the Zacks Consensus estimate of $2.34 billion. Sales on a year-over-year basis were down 19.1% in North America, down 29.2% in Europe , down 32.8% in emerging markets and down 23.3% in the Asia-Pacific. 

Revenue from servers fell 31.4% and from storage products almost 35.9% compared to the year-ago period. Revenue from new products dropped 33%, while unit sales of servers were down 41%. 

Revenue from Support Services decreased primarily due to customers seeking higher discounts, delays in service contract renewals and strong competitive pressures. Professional Services revenue decreased primarily due to decreased sales in the Systems business. 

The company said that revenue fell across all of its product lines negatively impacted by the pending approval from the European Commission and other foreign regulators on its acquisition by Oracle Corp. (ORCL). The delay in approval from the regulatory body is causing Sun Micro to lose about $100 million each month. 

Sun had earlier announced a headcount reduction of 3,000 or 10% over the next 12 months. It has already eliminated 7,600 positions in the past three years. The company, which is under severe financial pressure, is struggling to survive the recession. 

Despite cost-cutting efforts and increased layoffs, we remain concerned about the delay in closing the merger, which could reduce its value for Oracle’s business. Moreover, rivals such as International Business Machines (IBM), Hewlett-Packard (HPQ), Cisco Systems Inc. (CSCO) and Microsoft (MSFT) are taking advantage of the delay by giving discounts to customers. 

Sun’s performance has not been good for quite a number of quarters. The weak economy, slower adoption of new products, consolidation of the customer base, delay or cancellation of projects, increased competition and sluggishness in overall IT spending have taken a toll on the company. 

The company said that customers are exercising caution due to the delay in the acquisition, causing bookings in the quarter to fall 22.7% year over year and 11.4% quarter over quarter. Total backlog declined 5% year over year to $1.84 billion.
Balance Sheet 
Sun’s balance sheet and cash flow deteriorated considerably in the quarter. The company exited the quarter with $2.38 billion in cash and short-term marketable securities, down from $2.86 billion generated in the previous quarter. Long-term debt was $589 million in the quarter, up $8 million from the previous quarter. Operating cash flow declined to $38 million in the quarter from $75 million in the previous quarter.
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