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Sun Revises Third-Quarter Outlook
By Matthew Fordahl   Associated Press
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PALO ALTO, Calif. — Shares of Sun Microsystems Inc. fell 6 percent Friday after the network server maker warned that third-quarter earnings will fall short of expectations because of the faltering U.S. economy and a slowdown in demand for its equipment.

Earnings for the quarter ending in March are expected to be between 7 cents and 9 cents per share, or about half of the 15 cents per share predicted by analysts surveyed by First Call/Thomson Financial, the company said late Thursday.

Year-over-year revenue is expected to grow about 10 percent to 13 percent in the third quarter. Analysts had been expecting it to grow by 30 percent.

"We are disappointed in one and only one thing, and that is the U.S. economy," said Ed Zander, Sun's president. "The dramatic drop-off in capital spending — I can't recall something so sudden and of such a magnitude in my business career."

Investors weren't pleased by the news, sending shares down $1.25 to $19.56 in early trading on the Nasdaq Stock Market.

To help lessen the impact on its bottom line, Sun plans to slow spending in areas not including research and development. Hiring is expected to drop from 1,500 to 2,000 new workers in the third quarter to less than 500 in the fourth.

Zander told analysts on Thursday that Sun is a victim of the U.S. economy, not competition or product failures.

"We are gaining market share," he said. "We have great products with more coming, and a compelling strategy for the next decade."

Zander said international sales remain on target.

Michael Lehman, Sun's chief financial officer, declined to give any guidance to analysts for the fourth quarter, citing too many uncertainties.

Analysts were surprised by the magnitude of the third-quarter warning and remained uncertain how hard Sun would be hit by the economy's downturn.

Sun could have shielded itself from such a large hit by not focusing so much of its business in the dot com industry, Shebly Seyrafi, an analyst at A.G. Edwards & Sons.

"There is a general slowdown we're seeing across the board in (information technology) spending, but they had a large percentage of revenue from the dot-com revenue base," he said. "They're suffering disproportionately as the dot-com space has imploded."

Sun executives also announced the company will be buying back $1.5 billion in stock. Shares have lost half their value over the last year.

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