Updated from 4:40 p.m. ESTSAN FRANCISCO -- Sun Microsystems ( JAVA) raised its profit margin estimates for the year, as it delivered its fourth consecutive quarter in the black after Monday's close. But a stubbornly sluggish top line continued to dog the company, pushing its shares down in extended trading. The Santa Clara, Calif., company mustered meager 1% year-over-year sales growth in its fiscal first quarter, with revenue of $3.22 billion. Analysts polled by Thomson Financial were looking for $3.27 billion in revenue, the equivalent of 2.4% year-over-year growth. Sun executives stressed that the company is committed to doing better, with CEO Jonathan Schwartz describing top-line growth as "absolutely our No. 1 priority" in the current fiscal year. He pointed to strong orders for Sun's Niagara servers, up 70% year over year, and industry-standard servers based on Intel ( INTC) and Advanced Micro Devices ( AMD) microprocessors, up 10%, as indicators of increasing demand. "We think we're going to be more exposed to that growth," Schwartz said in a post-earnings conference call. That exposure apparently won't be enough to bump Sun's full-year revenue expectations, which continues to call for low-to-midsingle-digit growth. While Sun did raise its full-year gross margin estimate by one percentage point to a range of 44% to 47%, the company acknowledged that some of that upside is simply the result of lower-than-expected component costs.
In the recently ended fiscal first quarter, for instance, Sun said its 48.5% gross margin -- the best in seven years -- was helped by $25 million to $35 million in savings from cheap component prices. The results illustrate Sun's ongoing predicament. The company has made progress in returning the business to profitability after struggling for years in the wake of the dot-com bust. But beyond cost-cutting and pricing benefits, investors are still waiting to see signs of a marked turnaround in its fundamental business. In August, Sun announced that it was
cutting its headcount by an undisclosed number, about a year after laying off 5,000 workers. Sun said Monday it earned $89 million, or 3 cents a share, during the three months ended Sept. 30, in line with analysts' expectations. At this time last year, Sun posted a loss of $56 million, or 2 cents a share. According to Sun, its quarterly profit included a restructuring charge of $113 million, or 3 cents a share. The company said it experienced strong demand for its high-end server products as well as good growth in subscriptions for its identity-management software during the recently ended quarter. Sun's computer system revenue was up 0.5% year over year, while its storage business revenue increased 2.9%. Revenue from services was up a scant 0.7%.
Sun's efforts to reinvigorate its sales are also challenged by the economic problems affecting some of its largest customers. CEO Schwartz acknowledged that the company has seen some slowing in the financial services industry, especially among firms that are exposed to subprime mortgage issues, although he noted that traditional commercial banks and telecommunications companies are in good shape. "More broadly," said Schwarz, "more traditional industries are slow and frankly have been for a while." Shares of Sun were off 1.6%, or 9 cents, at $5.62 in extended trading.