Sun Microsystems Reports Preliminary Results for Fiscal Year 2005 and Fourth Quarter

Achieves 16th Consecutive Year of Positive Cash Flow From Operations Significantly Improves Operational Performance

SANTA CLARA, Calif., July 26 /PRNewswire-FirstCall/ -- Sun Microsystems, Inc., (NASDAQ: SUNW) reported results today for its fiscal fourth quarter, which ended June 30, 2005.

Revenues for the fourth quarter were $2.975 billion, a decrease of 4.3 percent as compared with $3.110 billion for the fourth quarter of fiscal 2004. Total gross margin as a percent of revenues was 41.4 percent, an increase of 2.0 percentage points as compared with the fourth quarter of fiscal 2004. Net income for the fourth quarter of fiscal 2005 on a GAAP basis was $121 million or a net income of $0.04 per share as compared with a net income of $783 million or a net income of $0.23 per share for the fourth quarter of fiscal 2004. The fiscal 2004 fourth quarter results included $1.6 billion of other income related to a legal settlement with Microsoft.

Fiscal 2005 Q4 net income included a net tax benefit of $190 million. Included in this amount was a tax expense of $82 million on income generated in certain foreign jurisdictions and adjustments for the difference between estimated amounts recorded and actual liabilities resulting from the filing of prior periods' tax returns. This expense was more than offset by a $249 million tax benefit arising from adjustments to our income tax reserves resulting from the June 2005 conclusion of both a previously disclosed U.S. income tax audit and a foreign income tax audit, and a $23 million net beneficial correction to the valuation allowance on deferred tax assets and prior years' state and foreign tax provisions.

For the full 2005 fiscal year, Sun reported revenues of $11.071 billion, a decline of 1.0 percent as compared with $11.185 billion for the full 2004 fiscal year. Total gross margin as a percent of revenues was 41.5 percent, an increase of 1.1 percentage points as compared with the 2004 fiscal year. The net loss for fiscal year 2005 was $11 million or a net loss of $0.00 per share as compared with a net loss of $388 million or a net loss of $0.12 per share for the 2004 fiscal year.

Net income for Q4 fiscal year 2005 on a non-GAAP basis was $200 million or a net income of $0.06 per share, excluding a charge of $84 million for workforce and real estate restructuring and the related tax benefit of $6 million, and a $1 million loss on equity investments. This compared with a net loss, on a non-GAAP basis, in Q4 fiscal 2004 of $173 million or a net loss of $0.05 per share.

Net income for fiscal 2005 on a non-GAAP basis was $184 million or a net income of $0.05 per share, excluding $260 million for workforce and real estate restructuring, a $6 million gain on equity investments, $54 million in additional settlement income from Microsoft, a charge of $55 million related to a litigation settlement with Kodak, a $34 million beneficial correcting adjustment to the valuation allowance on deferred tax assets, and $26 million for related tax effects. This compared with a net loss, on a non-GAAP basis, in fiscal 2004 of $791 million or a net loss of $0.24 per share.

Cash flow from operations for the fourth quarter was $195 million and $369 million for the full fiscal year, Sun's 16th consecutive year of generating positive cash flow from operations. The cash and marketable debt securities balance at the end of the quarter was $7.524 billion.

Steve McGowan, Sun's chief financial officer and executive vice president, corporate resources, commented, "We achieved impressive operational improvements in fiscal 2005 in the areas of gross margin dollars and percent, R&D and SG&A spend reductions, a $975 million non-GAAP net income improvement, and generation of $369 million positive cash flow from operations, our 16th consecutive year of generating positive cash flow from operations."

"Putting our cash to work, we've expanded our product portfolio and announced plans to acquire companies that deepen and broaden our systems strategy. We've materially grown our key communities including the Java(TM), Solaris(TM) and SPARC(R) efforts. We've maintained our R&D commitment and delivered crown jewels like Solaris 10 to the market," said Scott McNealy, chairman and chief executive officer, Sun Microsystems. "Big-time progress in FY05. The company is now in a position to take advantage of the investments we have made over the past few years and we believe there is more to come in FY06."

McNealy continued, "Our demand indicators for Q4 were positive. We have great partners, lots of cash, and a strong team across the board. FY05 was a year of stabilized revenue and earnings. Our opportunity for FY06 is sustained growth and profitability."

Please note that these results are preliminary and include a total of approximately $45 million in cumulative accounting adjustments. These reflect a variety of items detected during the Company's routine quarterly accounting review process. The two principal items are an increase in both revenue reserves and cost of goods sold. The company has reflected these items in the fourth quarter financial results and does not believe that they are material to any prior periods. Nevertheless, the company has not completed its review of this matter. Depending upon the outcome of that review, the company may conclude that these adjustments could result in restatements of prior period financial statements. Should the company reach that conclusion, the impact would be to improve the fourth quarter results reported today. The company expects to complete this process prior to filing its Form 10-K.

Sun has scheduled a conference call today to discuss its earnings for the fiscal year 2005 and fourth 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.

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This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future results and performance of Sun Microsystems, Inc., including statements that the company is now in a position to take advantage of the investments we have made over the past few years; that we believe there is more to come in FY06; that our opportunity for FY06 is sustained growth and profitability; that results are preliminary; that the company does not believe that these items are material to any prior period; that the company has not completed its review of the matter; that the company may conclude that these adjustments should result in restatements; that the impact would be to improve the fourth quarter results reported today; and that the company expects to complete this process prior to filing its Form10K. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors which could cause actual results to differ materially from those contained in our projections and forward-looking statements include: increased competition; adverse changes in market conditions both in the US and internationally; failure to timely develop, introduce and deliver new products and services; delays in product development or customer acceptance and implementation of new products and technologies; pricing pressures; failure to successfully integrate acquisition candidates; and failure to resolve the accounting for items identified and taken in the fourth quarter. Please also refer to Sun's periodic reports that are filed from time to time 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 reports on Form 10-Q for the fiscal quarters ended September 26, 2004, December 26, 2004 and March 26, 2005.

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