Updated from 4:59 p.m. ESTSun Microsystems' ( SUNW - Get Report) long-awaited comeback failed to materialize Tuesday, with sales in the first quarter coming in weaker than expected. Its top line aided by a pair of recent acquisitions, the Santa Clara, Calif., company bumped up its revenue nearly 4% from the year-ago period, with sales of $2.72 billion. But that was short of the $2.89 billion expected by analysts polled by Thomson First Call. After years of reeling from the dot-com implosion, the company has maintained it is finally ready to return to a growth phase. Shares of Sun were off 5% in after-hours trading to $3.79 on Instinet. Sun posted a loss of $123 million, or 4 cents a share, including a $50 million expense for employee stock options. The loss also included $60 million in acquisition-related charges, $12 million in workforce and real estate restructuring and a $17 million gain from equity investments and tax benefits. Excluding the charges, Sun lost $68 million, or a penny a share, in line with analyst expectations. A year earlier, the company lost $133 million, or 4 cents a share. Despite the disappointing quarter, Sun executives painted a rosy picture of the business. "We're getting awfully darned relevant again," Sun CEO Scott McNealy told analysts in a conference call following the announcement. "The world is going to need more servers going forward, that's our basic thesis -- they're not going to need fewer of them." The company has taken a number of steps to turn itself around, such as embracing the trend towards industry-standard servers based on the x86 chip architecture. In September, Sun introduced its Galaxy line of servers, which run on AMD's ( AMD) popular Opteron processors. And the company has made its Solaris operating system open-source and free. According to the company, there have been more than 3 million downloads of its Solaris 10 OS as of last week.
Meanwhile, Sun has gone on an acquisition binge, snapping up StorageTek and SeeBeyond in its first quarter. The two companies contributed $226 million to Sun's top line for the quarter, as well as $99 million in gross margin, $17 million in R&D expense and $87 million in selling, administrative and general expenses. Sun promised more benefits in the future as it cross-sells its products to its newly acquired company's customers, and vice-versa. But the boost provided by the acquisitions seemed to mask the company's lackluster fundamentals. Without the benefit of the acquisitions, Sun acknowledged that its fiscal first quarter product revenue was down 6% year-over-year. Sales were down in the U.S., Europe and Japan, with softness in the consolidating telecommunications industry playing a big role in the decline. The U.S. financial services industry, another key client for Sun, also disappointed. According to Sun, new product releases caused some financial customers to hold off on purchasing decisions. On the positive side, the company managed to keep gross margins on the rise, despite the fact that more than 75% of revenue now comes from low-cost, entry-level servers. Gross margins were 44.1%, up 3.3 percentage points from the year-ago period.