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Sun Spots Brighter Horizons as Losses Slow

Sun Microsystems is still losing money, but executives are optimistic about the company's prospects.

As part of its fourth quarter financial statements, the network computer maker reported a net income of $795 million or 24 cents per share in contrast to its net loss of $1.039 billion for the same time last year. The company also said its revenues increased 4.3 percent over last year to $3.11 billion. Much of the growth positives were enhanced by Sun's $1.9 billion settlement with Microsoft.

But excluding settlement income and other items, Sun said it made a loss of $169 million, or 5 cents a share, making it the 13th straight quarter of financial losses for the company. Analysts had only predicted a loss of 4 cents a share.

For the last 12 months, Sun also said it lost $11.185 billion in revenues, a decline of 2.2 percent as compared with 2003. The company also said its net loss for fiscal year 2004 was $376 million or 11 cents per share.

Sun CEO Scott McNealy was quick to defend his company's position, noting that Sun's services business reached a benchmark $1 billion in sales, with total revenues of $1.04 billion compared with $979 million in the same period last year.

"In fiscal 2005, we're focused on growing revenue and market share, generating cash, achieving sustained profitability, and rewarding long-term shareholders," said in a statement.

Sun said of the 3,300 employees scheduled for termination as part of a restructuring, a total of 2,400 have been notified. Sun now employs fewer than 35,000 people worldwide.

Jonathan Schwartz, Sun president and COO, also continued to highlight Sun's under-pricing of rival Dell systems by big margins; an extended family of servers including blades; relationships with ISVs like Oracle; positioning itself to aggressively support contract pricing vs. Linux distribution like Red Hat; and its largest developer and partner communities to date.

"Let's start putting some questions to rest," Schwartz said in a statement. "With the 74 percent sequential increase in Java Enterprise System subscribers, now totaling 303,000, we've made progress in both monetizing Java technology and driving long-term savings for customers. In addition, Solaris OS volumes and OEM support on industry standard AMD and Intel platforms grew at an accelerated pace, with a 25 percent increase in Solaris x86 registered licenses to almost 1.1 million and a 69 percent sequential increase in Software Express for Solaris x86. We are now unquestionably on the offensive, with powerful resources at our disposal, and an excellent product calendar."

Analysts are mixed on how well Sun can continue to produce.

Gartner Vice President of Strategic Marketing Laura McLellan sees recent Sun subscription model pilots, where developers are offered systems in exchange for software subscriptions, as a sign of profitability to come -- a profitability she believes will arrive for the fiscal year beginning this month. "How does HP sell against free?" she asks. A good question, but creating competing subscription models is one potential HP response.

As to the long-term future, McLellan sees Sun finding success selling computing power wholesale, through private labels. She predicts 50 percent of enterprises in the United States will have "shifted over from an asset to an access model by 2010," and Sun's billions of dollars in savings it will see it through and give it a jumpstart in this field.

New Servers, Workstations Coming

Sun has certainly placed high hopes on its V20z Opteron-based rack servers, believing the coupling of V20z and Solaris x86 revision 6 will be tempting for enterprises that have less than stellar Linux marriages.

One item that may encourage quick sales is the company's 4-way Opteron-based Sun Fire V40z. A German server sales site inadvertently posted specs Tuesday showing the availability of 32GB RAM, 6 Ultra320 SCSI non-removable disks. The site also posted information about two workstations with one (W1100z) or two (W2100z) AMD Opteron processors. The tower units reportedly offer a Gigabit Ethernet port, 5x USB 2.0, FireWire and a DVD ROM/CDRW combo drive. The image looked very similar to the workstations that Sun auctioned off on eBay last month. The formal announcement is expected to come on Monday, July 26.

"While Opteron is enjoying a great deal of success, there's a lot more to making Sun a success than just announcing 4-ways," George Weiss, Garner vice president and analyst told internetnews.com. "Sun must also clarify how they will position Linux against Solaris. Users may want to know of their intentions for open sourcing Solaris. There are a lot of other Opteron servers out there, so Sun will have to make sure that it is driving the market in some compelling way."

Still, the battle remains a steeply uphill one. First-quarter 2004 statistics from IDC show Sun's revenue 12.5 percent lower than it was in the first quarter of 2003. At the same time, Dell, Fujitsu, HP and IBM gained firmer footholds, and the overall server market grew 7.3 percent. Sun's current share of 10.2 percent brings it neck and neck with Dell, whose sweet spot holds a very different customer.

As Sun regroups, belts have been tightened and favors called in. In June, Sun closed its Newark, Calif., manufacturing plant. Two plants remain, one in Hillsboro, Ore., and another in Linlithgow, Scotland. In April, Sun quietly laid off thousands of employees in what has become an annual norm since 2001. It also put a fire under its management, appointing Jonathan Schwartz the new COO and reorganizing its hardware groups into two divisions, Throughput Systems (SPARC) and Network Systems (x86). In April, Sun reached a settlement with Microsoft from which it will receive more than $1.95 billion. The vendors also agreed to collaborate on technology.

But surreal wheeling and dealings aside, Sun has been burning rubber on the hardware development front. In February, the vendor more firmly redirected its approach to x86, adding the dual-Opteron Fire V20z rack server and dual Low Voltage Xeon B200x blades to the family.

At the same time, Sun fueled its Sun Fire servers with the explosive Chip Multithreading (CMT)-capable Solaris 10-ready UltraSPARC IV, adding the E2900, E4900 and E6900 in the midrange, and the E20K and E25K to the high end. Sun also stoked its NEBS-Certified offerings, replacing the Netra t1400/1405 with the UltraSPARC IIIi-based Tetra 440.

In a separate financial item, Sun denounced attempts last week by TRC Capital Corporation, a private Canadian investment company, to purchase as much as 25,000,000 shares (less than one percent), of Sun's outstanding common stock.

In a statement, Sun said it did not "recommend or endorse the mini-tender offer because it circumvented disclosure requirements of the Securities and Exchange Commission (SEC). In the past 12 months, TRC made similar offers for shares of companies including John Deere, Lockheed-Martin, BP and Hershey Foods.

"Companies that initiate a mini-tender offer investment scheme may do so deliberately because mini-tender offers do not provide nearly the same amount of investor protection that full-tender offers do under U.S. securities laws. This lack of investor protection helps companies making mini-tender offers, which catch investors off guard," a Sun spokesperson said.

Editor's note: ServerWatch columnist Ben Freeman contributed to this report.