Sun 2Q profit beats estimates

SAN FRANCISCO - Though happy about Sun Microsystems Inc.'s second-quarter results, investors remained wary about the server and software maker's ability to prosper under intensifying pressure from rivals.

The Santa Clara-based company posted profit and sales that inched past Wall Street's estimates Thursday after the market closed.

Shares rose more than 4 percent, or 71 cents, to $16.83 at the open of trade Friday. Shares had had risen $1.30, or nearly 9 percent, to $16.12 Thursday before the results were released.

While investors have been impressed by Sun's efforts to cut costs and improve the profitability of its products, they haven't been pleased enough to bid Sun's shares back up to $20 territory, where they stood after a 1-for-4 reverse stock split in November.

The essentially cosmetic move was intended to shed the stigma of slumping shares but was instead seen as a sign of trouble. The stock has declined steadily since then on fears about Sun's competitiveness and future profitability.

Sun executives sought to assuage those fears by reiterating its financial guidance of low- to mid-single-digit sales growth in 2008. Revenue is expected to grow more than 5 percent in the second half of the fiscal year.

Sun's net income leaped 95 percent, rising to $260 million, or 31 cents per share, for the three months ended Dec. 30. That was a penny higher than the average estimate of analysts surveyed by Thomson Financial, and nearly twice as high as Sun's profit of $133 million, or 15 cents per share, during the same period a year earlier.

Sales were $3.61 billion, slightly higher than the $3.59 billion Wall Street was expecting. They only inched up from the same period last year, when Sun registered $3.57 billion in sales.

Gross margin, which measures how much money a company made once the cost of making its products are stripped out, rose 3.5 percentage points over last year to 48.5 percent of revenues.

Sun executives said the company is profiting from a shift to more complicated setups of servers and data-storage machines, which command higher prices and lock customers in to longer service contracts.

Sun's deferred revenue — income for products it hasn't yet delivered — jumped 24 percent to $2.69 billion, a sign that Sun is locking in more future business.

Still, investors worried whether Sun can weather intensifying competition from rivals such as IBM Corp. and Hewlett-Packard Co. in the market for the servers that power corporate data centers and services to support them.

Sun has broadened its strategy of partnering with one-time foes to increase the adoption of Sun products, but the strategy has some shareholders worried that it will actually speed the adoption of rivals' products at Sun's expense.

Sun's server revenue was down 2.4 percent to $1.59 billion in the latest quarter, but the company experienced strong growth in its support services and data-storage divisions, whose sales each grew more than 4 percent, to $1.04 billion and $655 million, respectively.

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AP Business Writer Rachel Metz in New York contributed to this report.