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.

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