Sun Beams With Record Earnings

Sun Microsystems Inc. said third-quarter profit surged 26 percent on record revenue, bolstered by surging demand for the company's server products.

But shares dropped 5 points, or 8 percent, to 55 1/2 in early Friday trading after a Merrill Lynch analyst lauded the company, but cut its intermediate-term rating to accumulate from buy, based on the stock price.

The computer hardware and software manufacturer earned $291 million, or 71 cents a share, excluding a charge related to an acquisition. That compared with $232 million, or 59 cents a share, in the third quarter last year. Analysts were looking for an average of 70 cents a share, according to First Call.

Revenue surged 24 percent to $2.94 billion, led by higher sales of Sun's computer networking products.

On Thursday, Sun shares had closed down 2 1/8 at 60 7/16 ahead of the report, which came after the market closed.

Analysts were positive but cautious after the company's earnings were released.

"Sun has a tremendous amount of momentum in the marketplace and should benefit from continuing high growth rates and strong profitability," PaineWebber analyst Don Young said in a research note.

Michael Lehman, Sun's chief financial officer, said the company experienced strong demand for "workgroup servers, high-end servers, storage and services."

Still, some analysts voiced concern about how the rest of the year will turn out for Sun, citing potential year-2000-related problems and an increasingly competitive sales environment.

"What troubles us is that the visibility with respect to the interim period - i.e., between spring and the end of 1999 - seems singularly murky," said Richard Chu, an analyst with S.G. Cowen & Co.

Sun said revenue for the first nine months of its fiscal year totaled $8.2 billion, up 19 percent from the same period last year. Net income was up 23 percent to $761 million, excluding acquisition-related charges in both 1998 and 1999.

Written By Binti Harvey, CBS MarketWatch