The Unix Guardian--Sun Carbon Copies Another Q4 and Fiscal Year

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Volume 8, Number 29 -- August 7, 2008

Sun Carbon Copies Another Q4 and Fiscal Year

Published: August 7, 2008

by Timothy Prickett Morgan

While the company has the technical chops to compete with the best of the server and operating system makers left in the world, for whatever reason Sun Microsystems does not seem to have the marketing team, sales force, reseller channel, and price/performance advantages to turn that very good engineering work into increased sales and profits. The ending to fiscal 2008 on June 31 was a virtual carbon copy of the prior year's fourth quarter and full year, with some wiggling here and there in terms of sales and profits. But Sun has not pushed ahead financially as many inside and outside the company had expected--and an even larger number of investors had hoped.

Normally, when a major IT supplier does its quarter financial announcements, I drop whatever I am doing to get the coverage out on the IT Jungle site as quickly as I can. But, this time around, I was taking my daughter and a bunch of friends to a massive public pool in the Bronx for her birthday, and given the fact that Sun had already said Q4 was going to be disappointing a few weeks ago, I thought it wiser to spend time with my kids and get sunburn on my balded pate. If Sun had done something exciting--like throw out its management team or actually make some money--I would have run back to the office, punted the story out there on the Web, and then got back to the ice cream cake. But as I said, Sun seems to be stuck in a holding pattern, so I did what was more important on that Friday. (My assumption is that IT Jungle readers approve of my editorial and paternal decisions in this case.)

In the fourth fiscal quarter that ended in June, Sun's overall sales were $3.78 billion, down 1.4 percent, with product sales (meaning hardware and software) coming in at $2.39 billion, down 4.3 percent, and services sales at just under $1.4 billion, up 3.8 percent. Somewhat shockingly, within the product side of the business, sales of computer systems (meaning servers and a tiny smidgen of workstations and thin clients) in Q4 dropped by 7.1 percent to $1.72 billion, but storage sales rose by 3.9 percent to $664 million. Within the services portion of Sun's business, support services sales rose by 1.8 percent in Q4 to $1.04 billion, while professional services and training sales rose by 10.3 percent to $352 million. The company had an operating profit of $63 million, and after getting a $45 million settlement payment for a lawsuit (I believe this is a residue of the Microsoft hatchet-burying deal from a few years back, but I am not certain and Sun did not say what this was), the company managed to bring $88 million to the bottom line. Unfortunately for Sun, that was a 73.3 percent drop in net income from the year ago quarter.

In the conference call with Wall Street analysts last Friday, Sun's president and chief executive officer, Jonathan Schwartz, said that one of the big factors holding Sun down all through fiscal 2008 was its business--or lack thereof in terms of growth--in the United States. "Sun's revenue for the year was roughly flat with growth around the world entirely offset by declines in the United States," Schwartz explained. "The declines in the U.S. were about 8 percent for the year, and there is no question the challenging U.S. macro environment has hindered our ability to grow the top line. We have got a greater share of our business in the U.S. than many of our peers--and more of a focus on data center versus consumer technologies and, frankly, a historic focus on a fairly challenged financial services sector. With this in mind, we've been aligning ourselves with high growth customer segments, technologies, and emerging economies across the world, where our developer communities are healthiest and thus where our business opportunities are growing most dramatically as well."

Sun's business in the United States declined by 9.4 percent to $1.43 billion in Q4, with the rest of the Americas region up 19.1 percent to $287 million, EMEA up 3.6 percent to $1.42 billion, and Asia/Pacific down 3/10ths of a percent to $643 million. Considering the boom in Asia right now, I think Sun is stretching the truth a bit by laying the blame on its flat sales in the quarter on the United States. The weak dollar should be making any growth Sun has overseas amplify nicely in its financials, and as far as I can tell, the effect of currency means Asia was down for Sun and Europe was flat to down. Sun has hired 200 sales people to take on high-growth markets, including Brazil, India, Russia, and China, where it had double-digit revenue growth in the quarter.

For the fiscal 2008 year, Sun had sales of just under $13.9 billion, up 1/10ths of a percent from a year ago, with $8.62 billion in product sales, down 1.8 percent, and services sales of $5.26 billion, up 3.1 percent. For the year, Sun brought $403 million to the bottom line, a decline of 14.8 percent compared to fiscal 2007, which was no great shakes.

Schwartz said that the "Niagara" class of Sparc T1, T2, and T2+ servers represented $1.1 billion in sales in fiscal 2008, and that billings for these machines grew at 84 percent for the year, but that billings growth had tapered off to 61 percent in the fiscal fourth quarter. He did not provide specific revenue or shipment figures, but Schwartz said that sales for "Galaxy" X64 rose by only 1 percent in Q4 and by only 3 percent for the year. (If you look at Sun's presentation, it says X64 server unit shipments rose by 28 percent in the quarter, to something around 33,000, but overall server shipments rose by only 2 percent to something in the range of 97,000. If you do the math, that means Sparc shipments, including Niagara machines, fell by around 8 percent.)

Schwartz blamed the X64 server disappointment on delays in Advanced Micro Devices' "Barcelona" quad-core Opterons and on the fact that the company was in the middle of ramping its Intel-based servers throughout 2008. But the problem has to be larger than these delays in ramping products. Sun's Niagara and Galaxy servers are good designs, so something else is wrong. Either the channel can't sell it, or Sun's direct sales force can't, or scarier still is the possibility that server customers don't want to let Sun in on deals because they are already committed to IBM, Hewlett-Packard, or Dell.

Sparc-based server sales slowed in Q4, according to Schwartz, which he said was disappointing and which he attributed to hesitancy among buyers--particularly in the United States--to make commitments on big deals because of economic conditions, not product positioning. (Sparc Enterprise M series machines, which are rebadged Fujitsu-Siemens Sparc clones, were up 55 percent from the third quarter of 2008 and up over 200 percent (that's triple) what they were a year ago. So this is a bright spot. So might be the "Thumper" Sun Fire X4500 storage servers, a product that Sun has pitched as the linchpin in its open storage push, which grew billings by 37 percent in Q4 and which are most likely in the total server units figures. (Sun doesn't say.) Schwartz did say on the call that Thumper only accounted for $120 million in billings (not all of which have been yet booked as revenues, presumably) in fiscal 2008. The Sun Blade blade server line, which includes Sparc T and X64 processor options, had 15 percent growth in billings sequentially from fiscal Q3, and had over 200 percent growth year-on-year. Another potential bright spot. But again, these products have such low revenues and shipments that such growth is expected. Sun needs to sustain triple-digit growth for Galaxy, Niagara, and Sun Blade products if it wants to a player in the data center--and that is a nearly impossible task because IBM, HP, Dell, and others have pretty good products, too.

Because Wall Street has all public companies by the, er, balance sheets, Sun spent $464 million buying back its own shares during Q4 to help prop up earnings per share. The company has blown through all but $36 million of a $3 billion cash buyback plan authorized by its board of directors, and therefore the board just re-upped the financial engineering and authorized the company to spend up to $1 billion on share buybacks. With $3.3 billion in cash, and a market capitalization of $6.9 billion as I write this, Sun should borrow $3.6 billion from--well, I am not sure where, to be honest--and just take itself private and say the heck with being a public company. Maybe private equity firm KKR, which has already pumped $700 million into Sun and which is getting ready to take itself public (and probably just to cash itself out before the market really crashes), will have the extra cash laying around soon to give Sun a loan to do just that.

Stranger things have happened. I mean, look at the duck-billed platypus.