Sun upbeat on profits - and $700m cash injection

Sun Microsystems has posted a profit that beat Wall Street's financial expectations for its most recent quarter, and announced a $700m investment from an arm of private equity firm Kohlberg Kravis Roberts.

The software and server maker reported revenue of $3.57bn, a seven per cent increase from the year-earlier period, and profits per share of $126m, or 3 cents per share, using generally accepted accounting principles.

Excluding $58m of stock-based compensation, $26m of restructuring and asset-impairment charges and a $4m tax benefit, Sun had income of 5 cents per share for the quarter, which ended 31 December. That's well above the average of 1 cent per share expected by analysts surveyed by Thomson First Call. In addition, Sun's revenue exceeded that expectation of $3.52bn.

Speaking on a conference call, chief executive Jonathan Schwartz said he is "very pleased" with the second-quarter results, which he said show turnaround progress and customer confidence, adding: "We are very optimistic, and we are operating from a position of strength."

Sun's stock rose 47 cents, or eight per cent, to $6.13 in after-hours trading. The company has been struggling to return to profitability for years, though it's not the first time since the dot-com crash the company has been in the black.

In addition to reporting profits, Sun also announced that KKR Private Equity Investors, part of Kohlberg Kravis Roberts, has agreed to invest $700m in the computer maker. The investment will take the form of convertible notes, with half the convertible bonds due in 2012 and half in 2014. In addition, KKR will nominate a director to join Sun's board.

Schwartz called the KKR investment a positive development: "This is a strong endorsement of our strategy and our management team by one of the premium private equity firms," he said. "We will use the proceeds to pursue strategic opportunities for growth."

In a statement, KKR founding member George R Roberts praised Sun's new CEO. "Jonathan Schwartz and his team have demonstrated remarkable vision and strong discipline in executing its turnaround strategy… We are pleased to have the opportunity to pursue this investment through KKR Private Equity Investors in order to help Sun to best capitalise on its substantial growth potential."

Others saw more aggressive possibilities in KKR's move, though.

Technology Business Research analyst Martin Kariithi said: "Sun's financials make it an attractive buyout candidate. Operating expense has been way too high for as long as I can remember. I expect KKR to exert its influence to spur more aggressive operating-expense cuts, improving near-term operating leverage."

But buyouts are not on Sun's agenda. Bret Schaeffer, a vice president of finance, said in a conference call with reporters: "We don't have any intention of going private," adding that the funding will be used for strategic purposes such as acquisitions. He characterized KKR as a "high-quality, long-term investor".

There are barriers to a buyout, too. A Sun spokeswoman said a standstill agreement prevents KKR from taking more than a five per cent stake in Sun. Changing that arrangement would require approval from Sun's board, she said.

And a source familiar with the situation said KKR currently has no plans for future investment, and the current investment isn't a foothold for an eventual buyout.

Sun on Monday announced a partnership to sell servers with Intel's Xeon chips beginning in the second quarter of 2007. That deal won't result in significant revenue that quarter, however, chief financial officer Mike Lehman said.

Also for the quarter, Sun said its x86 server revenue grew 46 per cent compared to the year-earlier quarter, and its Sparc server revenue increased 18 per cent. Niagara system sales tallied more than $125m. In addition, Sun sold about $20m worth of its Sun Fire X4500 "Thumper" systems, a compact dual-processor server with as much as 24 terabytes of built-in storage, Lehman said.

CNET News.com's Scott Ard and Ina Fried contributed to this report

Stephen Shankland writes for CNET News.com