Warming Up to Sun Micro

Sun Microsystems (Nasdaq: SUNW  ) is showing signs of progress.

Down slightly year over year, second-quarter revenues rebounded 14% sequentially to $2.89 billion from $2.53 billion last quarter. Gross margins also bumped up 1.7 percentage points sequentially to 41.8%. As a result, the company narrowed its net loss to $125 million, or $0.04 per share.

Competitively, not much change showed up in its results. While service revenue grew to $944 million from $902 million last year, product sales fell to $1.94 billion from $2.01 billion. In contrast, IBM (NYSE: IBM  ) -- which competes with Sun on the high end -- reported 18% growth for its hardware division, while forecasting a strong 2004.

Where Sun gives reason to be optimistic is on the low end.

In November, the company announced an alliance with Advanced Micro Devices (NYSE: AMD  ) to use AMD's 64-bit Opteron chip in servers running Solaris and Linux. At the time, Sun's commitment to standardized chips gained the endorsement of Oracle (Nasdaq: ORCL  ) CEO Larry Ellison, who promised that, "Soon Oracle will run on AMD Opteron under both Solaris and Linux."

Yesterday, Sun CEO Scott McNealy pointed to the AMD alliance, saying that it "puts Sun in a strong product position for calendar year 2004." But let's not get carried away: Sun looks to be making progress, but all isn't clear just yet. Talk of actual profitability has been reserved for the future. The company declined to offer revenue or earnings forecasts.

That said, Sun still has $5.16 billion in cash, and continues cut costs here and there. To this end, management also announced yesterday that it would lay off 300 employees at its manufacturing plant in Northern California.

Sun doesn't quite qualify as "obviously cheap" with a market cap near $18 billion and an unclear profit outlook. However, the company is taking the necessary steps to both improve its competitive positioning and reduce costs. At the very least, Sun looks to be in better shape than it did just a few months ago.

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Jeff Hwang can be reached at JHwang@fool.com.