Sun Micro Narrows Loss

Revenue rises 3.6% but falls short of analysts' expectations.
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Updated from 8:10 a.m. EDT

Sun Microsystems

(SUNW) - Get Report

narrowed its first-quarter loss more than analysts expected and grew revenue for the second consecutive quarter, the computer and software maker said after the closing bell on Thursday.

In early trading Friday, Sun was up 12 cents, or 3.1%, to $4.09.

Although the company lost money on a GAAP basis and the gain in revenue was small, CEO Scott McNealy was cheerful and upbeat during a call with analysts. "We're going on the offensive big time," he said. For Sun, which had a long string of quarters in which revenue declined year over year, two sequential quarters of actual growth is notable, as is the first operating profit since June 2002 -- even if the numbers are small.

The biggest factor in the operating profit was cost-cutting. "It's nothing to jump up and down about, but it is a start. The company seems genuinely committed to profitability," said Brent Bracelin, who follows the company for Pacific Crest Securities.

But Bracelin added that deferred revenue, bookings and backlog were down in the quarter, an indication that the company has much more work to do. (His firm doesn't do banking with Sun.)

Excluding a $108 million writedown for personnel cuts and facility closures, and an $82 million charge as the result of a

litigation settlement with

Eastman-Kodak

(EK)

, the company earned a profit of $13 million, which is break-even on a per-share base.

Analysts polled by Thomson First Call were expecting a loss of 3 cents a share.

According to generally accepted accounting principles, the company lost $174 million, or 5 cents a share, compared with a loss of $286 million, or 9 cents a share, a year ago. Revenue was $2.63 billion, an increase of 3.6%, but about 3% lower than Wall Street's expectations of $2.71 billion.

Steve McGowan, Sun's CFO, said in a prepared statement: "We're very pleased with fiscal Q1 results. We grew revenue year-over-year for the second consecutive quarter, increased our gross margin percentage sequentially, lowered combined R&D and SG&A spending by over $260 million sequentially, and generated positive cash flow from operations."

Sun no longer gives guidance on most critical data points. McGowan did say that combined SG&A and R&D will decline from $5.2 billion in the last fiscal year to $4.7 billion this year. Sun does not break out the components of that number, but McGowan indicated that during a conference call R&D will be protected. For the just-completed quarter, combined R&D and SG&A were down $260 million sequentially.

Sun, which has never recovered from the end of the dot-com boom, has reduced staff by nearly 3,000 and has conceded that it must sell hardware using chips from both

Intel

(INTC) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

.

Sales of systems powered by those chips increased year over year but are still too small to be material, McGowan said.