Sun Looks to Future Revenue Growth, Profits After Down Q2

by Timothy Prickett Morgan

Sun Microsystems reported its fiscal 2004 second quarter financial results today, and while the numbers were not stellar, the company is moving in the direction of stabilizing product prices, increasing product volumes, and possibly getting back on track toward some revenue growth and decent profits. This is the message that Sun chairman and CEO Scott McNealy and CFO Steve McGowan tried to sell last week to Wall Street analysts. Whether they buy this idea, and whether Sun can cut costs and get profitable, remains to be seen.

For the second fiscal quarter ended December 28, Sun booked $1.94 billion in product sales, down 3 percent, and services revenues of $944 million, up 5 percent. Total sales were just under $2.9bn, 0.9 percent down from this time last year. In Q2 2003, Sun was writing off restructuring charges that caused it to book a net loss of $2.28 billion on $2.92 billion in sales, or a loss of 72 cents a share. This time around, thanks to those restructurings, Sun only booked a loss of $125 million or 4 cents a share. Sun's top brass were encouraged by strong sequential growth from the fiscal first quarter, and said that Q2 2004 represented the largest sequential growth that Sun has seen in any quarter since 1998--and Sun has had some excellent sequential growth quarters, so this is significant.

Sun said that this quarter the company experienced a more balanced mix of product sales, with the four-way V440, 12-way V1280, and much larger Sun Fire 15000 servers all selling well, experiencing both year-to-year and sequential shipment and revenue growth. In its Volume Systems Products group, McGowan said that Sun had strong growth in year-on-year shipments of servers, and shipment levels were the highest in Sun's history. Storage sales were up 7 percent sequentially, and attachment rates of storage on Sun's own servers approached 24 percent of Sun machines sold.

McNealy continued his now traditional position that Sun was not going to back off on research and development and that it would continue to use innovation to drive product sales. What he and his team seem to be focused on, now that they believe they are working on the right product mix with the impending introduction of Opteron-based servers and enhancements coming in the UltraSparc line of Sun machines, is making it up in volume, as the old adage goes. "We have been trying to drive unit volumes, and we have been very aggressive on pricing," explained McNealy. "You'll notice that revenue stopped declining this quarter," he said, meaning that Sun has the right prices on things, "and we believe that we can drive unit volumes now to pull up the revenue line." He said that Sun was working hard to get software and services add-ons to system sales to further increase sales.

But that is not all Sun is going to do to try to get profitable. McGowan said that to cut costs further, Sun would be shuttering its California factory and shift manufacturing to other facilities, which cuts costs two ways: by eliminating about 200 employees and by using up excess manufacturing capacity in its other plants. He also said that Sun would continue on its quest to outsource back office and non-core functions to cut costs, as it has been doing for the past several years. McNealy said that given the unpredictability of future spending by IT organizations, Sun was going to "try real hard to get profitable at the levels we are at right now." Sun has a backlog of orders in Q2 that was $100 million larger than the backlog in Q1, so it is hopeful that the next quarter will be better but absolutely unwilling to venture a guess if it will be.

McGowan said that sales in Europe were flat compared to last year's second fiscal quarter, but up 19 percent sequentially. Sales in the U.S. were down 4 percent year-on-year, but up 4 percent sequentially. Sales in Japan were down 21 percent compared to Q2 2003, but up 4 percent sequentially, and throughout the rest of the world, Sun's revenues were up 17 percent year-on-year and up 35 percent sequentially. The U.S. figures are somewhat bothersome, but pricing is much more aggressive in the States than elsewhere in the world in the server market.

As for any change in the relationship between Sun and sometimes partner-sometimes competitor Fujitsu, McNealy said that the relationship between the companies is complex and broad. For almost two years, rumors and suggestions have been swirling around that Sun might offload development of its Sparc servers to Fujitsu or somehow partner with it in a more direct way. This does not seem to be in the cards. While Fujitsu is a parts supplier to Sun, a reseller of Sun Fire systems in Japan, a Sparc chip licensee, and a Solaris server competitor (with its Fujitsu-Siemens alliances with Siemens) , it does not look like Sun is giving up on Sparc. Just the opposite, in fact. McNealy seemed as committed to future "throughput computing," multithreaded Sparc processors as ever.