Sun Microsystems Reports Profit for Fiscal 2005 Second Quarter

Sun Microsystems, Inc., (Nasdaq: SUNW - News) reported results today for its fiscal second quarter, which ended December 26, 2004.

Revenues for the second quarter were $2.843 billion, a decrease of 1.6 percent as compared with $2.888 billion for the second quarter of fiscal 2004. Total gross margin as a percent of revenues was 42.3 percent, an increase of 0.5 percentage points as compared with the second quarter of fiscal 2004. Net profit for the second quarter of fiscal 2005 was $19 million or $0.01 per share as compared with a net loss of $125 million or a net loss of $0.04 per share for the second quarter of fiscal 2004. This Q2 fiscal 2005 profit includes a charge of $24 million for previously announced workforce and real estate restructuring, a $9 million gain on equity investments, and a $6 million benefit for related tax effects. Excluding these amounts, net income for Q2 fiscal 2005 on a non-GAAP basis was $28 million or $0.01 per share as compared with a net loss, on a non-GAAP basis, in Q2 fiscal 2004 of $99 million or a net loss of $0.03 per share.

Cash generated from operating activities was $52 million for the quarter, and the cash and marketable debt securities balance increased to $7.464 billion.

"The second quarter delivered many positives, including x64 and x86 server unit volume growth, positive cash flow from operations, and stunning market reviews of Solaris(TM) 10 OS. It feels good to ring up a modest GAAP profit," said Scott McNealy, chairman and chief executive officer, Sun Microsystems, Inc. "Sun has one of its most rock solid product line-ups in history today. Innovation is increasingly marked by business models as much as technology. Sun's $1 per CPU/hour and the Sun Java(TM) Enterprise System are emerging models for recurring revenue. We are clearly reestablishing relevance in key markets."

Steve McGowan, Sun's chief financial officer and executive vice president, corporate resources, said, "We're pleased with our progress this quarter toward achieving our key financial goals. On a year-over-year basis, we increased our gross margin percentage, improved productivity by reducing R&D and SG&A expenses by $136 million and continued to generate positive cash flow from operations. This was all accomplished without compromising our product roadmaps."

Sun has scheduled a conference call today to discuss its earnings for the second quarter at 1:30 p.m. (PT), which is being broadcast live at www.sun.com/investors.

About Sun Microsystems, Inc.

Since its inception in 1982, a singular vision -- "The Network Is The Computer(TM)" -- has propelled Sun Microsystems, Inc. to its position as a leading provider of industrial-strength hardware, software and services that make the Net work. Sun can be found in more than 100 countries and on the World Wide Web at http://www.sun.com .

FOR MORE INFORMATION

INVESTOR CONTACT:
Jeff Boldt 650-786-0333
jeff.boldt@sun.com

MEDIA CONTACT:
May G. Petry 650-786-0034
may.petry@sun.com

INDUSTRY ANALYST CONTACT:
Joanne Masters 650-786-0847
joanne.masters@sun.com


This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding that innovation is increasingly marked by business models as much as technology, that Sun's $1 per CPU/hour and the Sun Java Enterprise System are emerging models for recurring revenue, that we have clearly reestablished relevance in key markets and that our key financial goals were all accomplished without compromising our product roadmaps. Factors that could cause results to differ include risks associated with lack of success in technological advancements; lack of acceptance of new products; lack of marketing success; and cancellation or delay of projects. These and other risks are detailed from time to time in Sun's periodic reports that are filed with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended June 30, 2004 and our quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004.

The company believes that presentation of results including items such as net income (loss) and gross margin on a non-GAAP basis provides meaningful supplemental information to both management and investors that is indicative of the Company's core operating results and facilitates comparison of operating results across reporting periods.

NOTE: Sun, Sun Microsystems, the Sun logo, Solaris, Sun Java Enterprise System and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and in other countries.

SUN MICROSYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share amounts)

Three Months Ended Six Months Ended
Dec. 26, Dec. 28, Dec. 26, Dec. 28,
2004 2003 2004 2003

Net revenues:
Products $1,842 $1,944 $3,518 $3,578
Services 1,001 944 1,953 1,846
Total net revenues 2,843 2,888 5,471 5,424
Cost of sales:
Cost of sales-products 1,068 1,107 2,072 2,072
Cost of sales-services 572 573 1,123 1,128
Total cost of sales 1,640 1,680 3,195 3,200
Gross margin 1,203 1,208 2,276 2,224
Operating expenses:
Research and development 447 471 863 938
Selling, general and
administrative 716 828 1,400 1,626
Restructuring charges 24 (10) 132 (9)
Purchased in-process
research and development -- -- -- 1
Total operating expenses 1,187 1,289 2,395 2,556
Operating income (loss) 16 (81) (119) (332)
Gain (loss) on equity
investments, net 9 (36) 5 (61)
Interest income, net 33 20 64 41
Income (loss) before
income taxes 58 (97) (50) (352)
Provision for income taxes 39 28 78 59
Net income (loss) $19 $(125) $(128) $(411)

Net income (loss) per
common share-basic $0.01 $(0.04) $(0.04) $(0.13)
Net income (loss) per
common share-diluted 0.01 (0.04) (0.04) (0.13)
Shares used in the
calculation of net
income (loss) per
common share - basic 3,360 3,262 3,349 3,248
Shares used in the
calculation of net
income (loss) per
common share - diluted 3,400 3,262 3,349 3,248



SUN MICROSYSTEMS, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)

December 26, June 30,
2004 2004*
(unaudited)

ASSETS
Current assets:
Cash and cash equivalents $1,863 $2,141
Short-term marketable debt securities 1,776 1,460
Accounts receivable, net 1,842 2,339
Inventories 429 464
Deferred and prepaid tax assets 88 62
Prepaid expenses and other current assets 869 837
Total current assets 6,867 7,303

Property, plant and equipment, net 1,903 1,996
Long-term marketable debt securities 3,825 4,007
Goodwill 406 406
Other acquisition-related intangible assets, net 90 127
Other non-current assets, net 648 664
$13,739 $14,503
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
short-term borrowings $-- 257
Accounts payable 963 1,057
Accrued payroll-related liabilities 604 622
Accrued liabilities and other 1,196 1,308
Deferred revenues 1,313 1,617
Warranty reserve 236 252
Total current liabilities 4,312 5,113

Long-term debt 1,145 1,175
Long-term deferred revenues 519 557
Other non-current obligations 1,242 1,220
Total stockholders' equity 6,521 6,438
$13,739 $14,503

* Derived from audited financial statements



SUN MICROSYSTEMS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)

Six Months Ended
December 26, December 28,
2004 2003

Cash flows from operating activities:
Net loss $(128) $(411)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 323 361
Amortization of other intangible assets
and unearned equity compensation 49 46
Deferred taxes (3) --
Loss (gain) on equity investments, net (5) 61
Purchased in-process research and development -- 1
Changes in operating assets and liabilities:
Accounts receivable, net 508 178
Inventories 37 (63)
Prepaid and other assets (76) (59)
Accounts payable (88) 4
Other liabilities (441) (449)
Net cash provided by (used in) operating
activities 176 (331)
Cash flows from investing activities:
Purchases of marketable debt securities (2,943) (5,065)
Proceeds from sales of marketable debt
securities 2,287 5,029
Proceeds from maturities of marketable
debt securities 508 --
Proceeds from sales of equity investments,
net 13 10
Acquisition of property, plant and equipment,
net (141) (127)
Acquisition of spare parts and other assets (42) (26)
Payments for acquisitions, net of cash acquired -- (190)
Net cash used in investing activities (318) (369)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 114 113
Principal payments on borrowings and
other obligations (250) --
Net cash provided by (used in) financing
activities (136) 113
Net decrease in cash and cash equivalents (278) (587)
Cash and cash equivalents, beginning of period 2,141 2,015
Cash and cash equivalents, end of period $1,863 $1,428



SUN MICROSYSTEMS, INC
NON-GAAP CALCULATION OF NET INCOME (LOSS) EXCLUDING SPECIAL ITEMS
(unaudited)
(in millions, except per share amounts)


Three Months Ended Six Months Ended
Dec. 26, Dec. 28, Dec. 26, Dec. 28,
2004 2003 2004 2003

Calculation of net income
(loss) excluding special items:
Net income (loss) $19 (125) (128) (411)
Restructuring charges 24 (10) 132 (9)
Purchased in-process research
and development -- -- -- 1
Loss (gain) on equity
investments, net (9) 36 (5) 61
Settlement of litigation -- -- 55 --
Related tax effects (6) -- (13) --
Net income (loss) excluding special
items $28 (99) 41 (358)
Net income (loss) excluding special
items per common share - basic $0.01 (0.03) 0.01 (0.11)
Net income (loss) excluding special
items per common share - diluted $0.01 (0.03) 0.01 (0.11)
Shares used in the calculation of
net income (loss) excluding special
items per common share - basic 3,360 3,262 3,349 3,248
Shares used in the calculation
of net income (loss) excluding
special items per common
share - diluted 3,400 3,262 3,378 3,248




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Source: Sun Microsystems, Inc.

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