Original URL: http://www.theregister.co.uk/2008/10/30/sun_q1_2008_numbers/

Sun doused with red ink in Q1

Blames The Meltdown, write-offs

By Timothy Prickett Morgan

Posted in Servers, 30th October 2008 23:01 GMT

Server and software maker Sun Microsystems reported its first quarter of fiscal 2009 today, and the red ink was flowing as high-end Sparc server sales dried up at the same time that the company had to book a $1.45bn acquisitions write-off - presumably related to its $4.1bn acquisition of StorageTek a few years back and more recent deals, like the $1bn MySQL acquisition.

The one thing that Sun did not announce in its flurry of numbers - including a much clearer reckoning of its sales by product category than it has ever done in the past - were layoffs above and beyond the restructuring that it already announced this year.

If you don't count the write-off of goodwill - and you want to be generous - you could say that Sun is not doing too badly. But such impairments count to investors and accountants, and Wall Street will no doubt be upset that Sun had an operating loss of $1.65bn and a net loss of $1.68bn, or $2.24 per share. (Like Wall Street is doing any better?)

This time around, Sun booked $2.99bn in total sales in the quarter, down 7.1 per cent. Product sales came in at $1.76bn, down 10.9 per cent, while services sales fell one per cent to $1.23bn. In the year ago quarter, which was not particularly good for Sun, the company had $3.2bn in sales and brought $89m, or 10 cents a share, to the bottom line.

"All in all, it was a tough quarter," explained Jonathan Schwartz, Sun's president and chief executive officer, in a call with financial analysts after the market closed. And whatever he said after that was garbled by a cranky audio stream from Sun's supplier for Webcasts, UStream.tv. Every other sentence was garbled on the two computers I use, with both Internet Explorer and Firefox.

"We believe that tough times create an opportunity for innovation and - bleep blurp bloop," Schwartz went on to say. He said that Sun had experienced a slowdown in North America, Europe, and Asia/Pacific, and that the traditional midrange and high-end server business had a 27 per cent sales decline as CIOs put off spending.

But x64 server sales rose by four per cent and blade server sales (across Sparc and x64 architectures) were up by 32 per cent in the quarter, which was encouraging to him. Also encouraging were sales bumps in Germany, Spain, and Portugal, but the North American shortfall, driven mostly by skittishness at financial services companies where Sun does - or at least did - a lot of its business.

Chief financial officer Michael Lehman, through all the bleeps and blurps, appeared to say that Sun was experiencing a challenging environment and made it clear (well, sort of) that Sun was dissatisfied with its results for Q1. Lehman then went on to say that given the current economic climate, Sun would not be providing any revenue or profit guidance for the rest of 2009. Wall Street model makers, you are on your own.

Luckily, Sun has helped you a bit with your homework, as you can see on page six of its financial presentation. The table shows the past nine quarters of Sun's business broken down by server, storage, software, and services categories. Revenue figures are presented as those billed during the quarter, with reserves and other adjustments taken out. Schwartz and Lehman promised more transparency in the Sun financial reports last year, and they delivered.

Breakin' it down

Sun's Sparc Enterprise saw a 27 per cent decline in the quarter to $576m. (All of these figured are billings, not revenues). The "Niagara" family of Sparc T series servers had an 83 per cent increase in sales, to $338m, and Schwartz was at pains to say that it was not customers shifting from bigger and more expensive Sparc boxes to its multicore, multi-threaded machinery, but really that big Sparc iron at its largest customer accounts has been put on hold because of the nasty economic climate out there. Particularly in financial services, and particularly in North America.

Sun's "Galaxy" x64 business had a four per cent increase in billings, to $176m, in fiscal Q1, and other systems products - mainly prior generations of UltraSparc-IV systems, which are nearing their end of life - had a decline of 56 per cent to $156m. Sun added at the bottom of the presentation that blade servers across the Sparc and x64 architectures accounted for $73m in billings, up 32 per cent. This $73m is already spread across the server numbers above.

Software is also crammed into the computer systems category, with Java getting $34m in billings (up 18 per cent), MySQL and related products at $37m (up 50 per cent), and Solaris management and virtualization tools at $53m (up 21 per cent). Solaris 10 is, of course, given away for free or bundled on Sun and Fujitsu-Siemens iron, and the real money is now in Solaris support contracts.

Within the storage category (which Sun does not put in computer systems), disk, and storage arrays had $311m in billings, up 3 per cent, while the open storage products (mainly the "Thumper" X4500 storage server) had $25m in billings, up 162 per cent but against a very weak fiscal 2008 Q1 where sales all but dried up. (This can happen to a new product line with very few sales). Tape storage accounted for $188m in billings, down 4 per cent.

When you take out $114m in reserves and adjustments for systems and software and $28m for storage, you get $1.76bn in product sales.

Services has two components in the Sun general ledger. Hardware and software support (including that for Solaris) is lumped into one category, with $963m in billings, down 2 per cent, and professional services with $263m in billings, up 1 per cent.

Rather than cut costs by laying off more employees or selling off business units - both of which have been suggested by Wall Street analysts for many months - Schwartz indicated that the plan for Sun remained largely the same: get into more accounts and sell more stuff.

"We understand that we have to balance our costs in light of the new economic environment," he said. "There is very much a new reality in the market." But, as an example, Schwartz said that Sun is trying to figure out how to get the 11 million users of the MySQL database to buy other Sun hardware, software, and services.

"The biggest cost we can take down is that relating to selling to a new customer." And rather than sell off any assets, Schwartz said that Sun was focused on selling its products and acquiring assets from its cash, which stood at $2.6bn if you include short term securities as the quarter ended in September.

"Innovation tends to love a crisis," he explained. "We were probably on our back foot with the pop of the Internet bubble, and I think you will find us on our front foot as we deal with the current crisis."

It will be interesting to see what Southeastern Asset Management, which is Sun's largest shareholder, and KKR, another big investor, think about all of this. So far, they have kept mum on the subject - at least publicly. ®