Original URL: http://www.theregister.co.uk/2009/01/28/sun_q2_earnings/

Big Sparc crunches Sun's Q2

IBM memo lost on Schwartz

By Timothy Prickett Morgan

Posted in Financial News, 28th January 2009 00:48 GMT

Server and operating system maker Sun Microsystems has reported financial results for its fiscal second quarter, and the news was as bad as Wall Street expected.

Sun's sales fell 10.9 per cent to $3.22bn in the quarter, and the company booked a loss of $209m. Sun was pushed to the loss by a $222m restructuring charge relating to the layoffs it announced in November. Between 5,000 and 6,000 employees are departing the company's 33,400-strong workforce.

Sun's product sales, which are mostly for servers and storage, came to $1.94bn, down 13.8 per cent, while services revenues fell to $1.28bn, down by 6.2 per cent.

The usual breakdown in products that Sun spews over the Web to reporters wasn't available due to, well, a technical problem. Sun eventually posted a Web 0.5-style phone number on its investor relations site to get us plebes on the call. I got on just as Jonathan Schwartz, Sun's president and chief executive officer, started talking about Sun's systems business. (About 10 minutes into the call, if it started on time).

Sun started by giving a financial breakdown by product family, but this breakdown is based on billings during a quarter versus revenue booked. So the numbers, while an improvement over the skinny data Sun used to give out, do not give a precise picture of the revenue during the quarter.

Billings fell 32 per cent with Sun's high-end and midrange Sparc Enterprise servers - which are comprised of some older UltraSparc-IV kit made by Sun and mostly rebranded gear made by Sparc partner Fujitsu. For all of IBM's talk last week about how virtualized high-end Power and mainframe systems were sucking the life out of its x64 business, Sun's customers didn't seem to get the memo. (Sun is more heavily focused in financial services, telco, and government than is IBM, so that might have something to do with it). Sun's "Niagara" entry and midrange multithreaded Sparc T machines continue to be a bright spot for the company, with billings up 31 per cent to $369m in Q2.

Schwartz said that the Niagara family of machines is now at a $1.4bn run rate. What is probably happening in Sun's Sparc business - only Sun knows this for sure, and it sure didn't say so - is that many of Sun's customers who might have bought midrange Sparc Enterprise machines have downshifted to bigger (and less expensive) Niagara boxes. They all run the same Solaris, after all.

Schwartz said that the high-end business tends to be lumpy, reminding Wall Streeters that high-end revenues were up 16 per cent two years ago and up 23 per cent in fiscal Q1 2008. In fiscal 2007 and 2008, billings for big Sparc iron were essentially flat at $3.4bn. To meet that level of billings in fiscal 2009, Sun has two quarters (and one of them half done) to bill nearly $2.2bn in big Sparc boxes.

Sun hasn't had two quarters in a row like that for big iron in a long, long time. So a decline for Sparc Enterprise machines this fiscal year seems likely, given the state of the global economy. And Niagara machines will have a tough time filling in the gap.

Galaxy Quest

Sun's "Galaxy" line of x64 servers managed to eke out some growth too, with billings up 11 per cent to $175m in the quarter. But this was nowhere near the levels that Sun needs them to be if it wants to a player in x64 servers and, more importantly, get Solaris generating lots of revenues again. Sun's blade business grew at 62 per cent in the quarter, but it's growing from a miniscule revenue stream. When asked, Schwartz danced around the question of what the Solaris attach rates were for Galaxy boxes. "That continues to be difficult to lens," Schwartz said. "We continue to see growing interest." (He may be a fine candidate for Senate some day).

Sun's financial presentation showed that overall server shipments fell by 9 per cent to somewhere around 80,000 units in the quarter, while x64 server shipments rose by 15 per cent to what looks like around 33,000 units. That means Sparc-based server shipments - including good Niagara server movement - fell by around 13,000 units compared to last year to around 47,000 machines.

When you toss in other hardware, Sun's billings for systems came to $1.34bn in the quarter, down 25 per cent. In the first fiscal quarter, which is when the Meltdown just got a good head of steam, billings were down 17 per cent to $1.25bn. The compares are not going to get any easier as the rest of fiscal 2009 unfolds.

Sun's software business was a way that the company could throw some big percentages of growth on the board, but the billings are still quite small. Java billings were up 47 per cent to $67m, and MySQL billings rose by 55 per cent to $81m. Solaris and related management and virtualization software saw a 29 per cent decline to $42m.

With adjustments for revenue deferrals, reserves, and other factors, Sun cut out $156m in billings to get to the actual revenues booked for computer products in Q2, which came to $1.37bn.

As with servers, Sun has carved up its server lines so it can at least show some good percentages. While disk and storage array billings fell by 5 per cent to $386m, Sun's so-called open storage products (which means servers with lots disk drives, Solaris, ZFS, and a bunch of the stuff tossed in) posted a 21 per cent gain in billings. But sadly, this only accounted for $31m. Sun's tape products had a 13 per cent decline in billings, to $245m, and after $100m in adjustments, storage revenues came to $570m.

On the services front, which has been a relative strong point for Sun in recent years, hardware and software support billings - which includes the all-important contracts for supporting the Solaris operating system - fell by 9 per cent to $946m. Professional and education services grew by only 3 per cent, to $335.

As you might expect, neither Schwartz nor Michael Lehman, Sun's chief financial officer, were in any mood to give revenue or profit guidance looking ahead into the rest of fiscal 2009. And when asked repeatedly about what the IT budget environment looked like, Schwartz danced again, saying that big projects were being put on hold in some places, but not in others.

Lehman said that Sun's payroll actually grew a tiny bit in the quarter and that it was still on track to layoff between 5,000 and 6,000 employees. The $222m stomached in Q2 is but a piece of the $500m to $600m in restructuring charges Sun will take to release those employees. Most of the write-offs will be done by the end of Q3, and Sun expects to cut somewhere between $700m and $800m in costs by doing the layoffs. This, in theory, should make Sun profitable at some point down the road. Lehman added that he expected the March quarter to be quite a challenge, even given the normal seasonality Sun sees this time of year.

On a geographic basis, Sun's sales in Q2 fell by 11 per cent in North America to $1.25bn, by 13 per cent in Europe to $1.06bn, by 20 per cent in Asia/Pacific to $354m, and even by 1 per cent in the emerging markets (Brazil, Russia, India, and China, among a handful of others) to $547m. ®