UPDATE 3-Sun Micro beats consensus, shares rally

* Adj Q2 loss one cent vs nine cent loss consensus

* Stock rises 6.5 pct after hours, extending gains

* Revenue down over year ago
(Adds analyst's comment, updates stock)

By David Lawsky

SAN FRANCISCO, Jan 27 (Reuters) - High-end computer and
software company Sun Microsystems (JAVA.O) posted
better-than-expected results as a strong software and open
storage business cushioned declining overall sales, and its
shares rose.

The company, which like rivals Dell Inc (DELL.O) and EMC
Corp (EMC.N) is struggling with diminishing tech spending,
posted an 11 percent decline in quarterly revenue.

Gross margins shrank to 41.9 percent from 48.5 percent a
year ago.

Sun sold more storage products than analysts had expected.

"This is an expectations game and things weren't as bad as
people thought, but trends are still eroding," said Brent
Bracelin of Pacific Crest Securities. "It doesn't mean there is
any sign of improvement, year over year."

Excluding restructuring and related impairment charges and
including stock-based compensation and amortization charges,
Sun posted a loss of 1 cent per share in the fiscal second
quarter ended Dec. 28, versus a consensus loss of 9 cents,
according to Reuters Estimates.

Sun reported a profit of 15 cents per share, excluding
charges for amortization and stock compensation, which Bracelin
took as a positive sign.

"The company returned to profitability, while people were
looking for it to lose money again," he said.

Sun again declined to give an outlook for the current
quarter.

The company -- which is shedding up to 6,000 jobs or 18
percent of its workforce -- said it had a net loss of $209
million, or 28 cents a share for the quarter, compared with a
net profit of $260 million, or 31 cents a share, a year ago.

The company reported revenue of $3.22 billion, compared
with $3.62 billion one year ago.

At the end of the second quarter total software billings
rose 21 percent year over year, and is now at an about $600
million annual run rate.

Billings on open storage products climbed by the same
percentage to an annual run rate of about $100 million.

In contrast, total sales of server systems fell 9 percent
in the quarter by volume, to about 80,000 units.

Sun Microsystems shares were up 6.5 percent in after-hours
trading at $4.25, after closing at $3.99 on the Nasdaq.

The shares embarked on a steady downtrend from May, when
the company surprised investors with a quarterly net loss.

Goldman Sachs had added Sun to its "sell" list and cut its
price target, saying the company's lack of a diversified
portfolio put it at a competitive disadvantage.

Sun offers much of its software free in an open model,
including a database and an office suite, seeking to foster its
broad adoption. It sells other software, along with service and
hardware.

Like much of the industry, the company is now struggling to
slash costs as tech spending dissipates globally. It said in
November it would cut 5,000 to 6,000 jobs, or 15 to 18 percent
of its workforce, as part of a plan to save $700 million to
$800 million a year.

Most of the Santa Clara, California-based company's
competitors have similar plans. Sun competes against
International Business Machines (IBM.N), Hewlett-Packard Co
(HPQ.N) and Dell Inc (DELL.O) in the sale of server computer
systems. It competes against EMC as a maker of data storage
equipment. [ID:nLQ269931]

Early this year, Sun acquired Q-Layer, a "cloud computing"
company that does off-site storage.
(Writing by Edwin Chan; editing by Carol Bishopric)