Sun Micro Doubles Profit

Updated from 4:20 p.m. EST

SAN FRANCISCO -- Sun Microsystems(JAVA Quote) doubled its bottom line in its fiscal second quarter, beating Wall Street expectations by a penny.

The Santa Clara, Calif., computer hardware and software vendor said it earned $260 million, or 31 cents a share, in the three months ended Dec. 30, vs. net income of $133 million, or 15 cents a share, at this time a year ago.

The average analyst expectation called for 30 cents in EPS, according to Thomson Financial.

Earlier this month, Sun pre-announced its quarterly results, projecting EPS between 28 cents and 32 cents, and revenue of about $3.6 billion.

Shares of Sun climbed 16 cents to $16.28 in recent after-hours trading.

Sun's progress in retuning to profitability has come despite consistently sluggish growth on the top line. The fiscal second quarter's $3.61 billion in revenue represents a scant 1.4% increase from last year's level, with most of that growth coming from Sun's services and storage business.

The computer systems group, which sells servers for corporate data centers, saw sales decline 2.4% year over year.

In a post-earnings conference call, Sun executives repeated their mantra that growth is the company's "No. 1 priority," and said the planned acquisition of open-source software firm MySQL positions Sun to tap into new growth opportunities.

They also pointed out that a switch in Sun's business practices to a so-called channel inventory sellout model resulted in a healthy rise in deferred revenue, but took some growth away from the company's net revenue line.

At the end of the day, however, Sun's server unit shipments were up a modest 2% year over year.

CEO Jonathan Schwartz said the company didn't see as much growth as expected from servers featuring industry-standard x86 microprocessors, owing to Advanced Micro Devices(AMD Quote) delays in shipping its new Barcelona processor and the relatively low volumes of Intel's(INTC Quote) newly released chip.

On the other hand, he noted that servers based on Sun's proprietary Niagara microprocessor saw sales increase by more than 100% year over year to $285 million.

In general, Schwartz said, customers are ordering a smaller number of expensive, richly configured servers instead of hundreds of low-end, single-processor machines. That trend plays to Sun's strength, he said, and is reflected in the company's increasing gross profit margin.

In the fiscal second quarter, Sun's gross margin increased more than 3 percentage points to 48.5%.

CFO Mike Lehman said that the gross margin will dip back down in the two remaining quarters of its fiscal year, with a range of 45% to 47% in the second half.

While Sun didn't provide specific financial guidance for the current quarter, Lehman said the company expected revenue growth of at least 5% in the second half of its fiscal year.

"Given the bookings we saw, the channel inventory reductions we accomplished in Q2 and the products rolling out, it's fair to say that we don't expect all the growth to happen in Q4," said Lehman.