£630m shadow over Sun Micro

SUN Microcsystems, hit more heavily than rivals by the hi-tech recession and struggling to regain profitability, will take a $1.05bn (£630m) hit to write-down the value of tax credits, turning a fourth-quarter profit into a loss.

It also warned that it is heading for a bigger first-quarter loss than previously expected.

Sun's revised fourth-quarter results will show a net loss of $1.04bn instead of the net income of $12m it reported in July.

A Sun spokesman explained the accounting changes with a gloomy assessment of the company's immediate prospects.

'If you don't have income and profits at the level you anticipated you can't then use the deferred tax assets,' Andrew Lark said.

He said the change reflected 'a downward revision in our planned profitability levels for 2004'.

After the write-down, Sun still had $582m in deferred tax assets. 'But obviously we anticipate a return (to profitability), given we did not write off the full amount,' he said.

The share price crashed 10% in after-hours trading on the news.

The downturn in technology spending has hit Sun harder than rivals offering cheaper products. The company, headed by chief executive Scott McNealy, is squeezed in the high-end server market by IBM and HP and at the lower end by Dell.

Sales have fallen for nine quarters in a row, and the company's market share fell to 14% in the second quarter, down from 17% a year earlier. Struggling to return to the black, it has already laid off 8,300 employees and announced further cuts of about 1,000 workers in the coming months.

With little more to cut, it is now pinning its hopes on the new N1 automated computing architecture and a new generation of servers and workstations.

'The pricing environment continues to be very difficult for Sun and it's a company that continues to struggle,' Brent Bracelin, an analyst at Pacific Crest Securities, was reported as saying.

'We continue to be very bullish about a recovery in the server industry, but Sun is just not a company that's benefiting from the turnaround, and they are becoming less and less relevant,' he said.

To add to the company's problems, it is facing charges by the US Commerce Department of violating export rules for sales to Hong Kong and Egypt.

The government may add two new charges related to records of shipments to Syria, the company said in a filing with the Securities and Exchange Commission. Sun has until the end of next month to respond and says it is 'reasonably likely'' it can reach an agreement.