Original URL: http://www.theregister.co.uk/2009/11/08/sun_q1_f2010_numbers/

Sun files $120m loss on the hush

Only $120m. Well done

By Timothy Prickett Morgan

Posted in Servers, 8th November 2009 03:43 GMT

It was a week later than El Reg expected, but the behavior was the same. After the stock market closed on Friday and everyone was heading home for the weekend, server and operating system maker Sun Microsystems snuck out its financial results for the first quarter of fiscal 2010. Revenues fell 25 per cent to $2.24bn.

Sale have been hammered by the uncertainty surrounding the fate of Sun's products as the $7.4bn acquisition of Sun by Oracle is held up by European antitrust regulators, but through deep cost cutting, Sun was able to report a mere $120m loss in the quarter, a far cry better than the $1.68bn loss it booked in the year-ago quarter.

As has been the case since the Oracle deal was announced, neither hide nor hair of Sun's top brass - chairman, Scott McNealy; president and chief executive officer, Jonathan Schwartz; and chief financial officer, Mike Lehman - were to be seen as Sun dropped its Q1 fiscal 2010 results into the SEC's Edgar system and headed for the hills of Silicon Valley. Sun's executives have been muzzled so as to not upset any regulators and when they do speak, it seems to be from an Oracle script.

But Sun is still an independent company, you must remember, and one owned by its stockholders at that. It will be interesting to see what shareholders think if Oracle doesn't close the deal before December 17 and Sun's top brass have to face questions about their golden parachutes and how far Sun missed its revenue targets for fiscal 2009.

Some may even think that selling the company might not have been such a good idea and that the better thing to have done was to remain independent and fire 8,000 people to get costs in line with sales with a little profit left over. Had Sun done that - instead of doing an acquisition dance first with IBM and then being pushed into the loving arms of Oracle -it might be a profitable company talking about the expected upturn in sales that Cisco, IBM, and others are beginning to mumble about. But it was easier to sell out to IBM or Oracle than to face up to killing off the "Rock" UltraSparc-RK processors and sorting out some sort of coherent strategy with partner Fujitsu for Sparc servers and Intel and AMD for x64 servers.

Now Larry Ellison gets to decide what is coherent and what is not, and that is almost enough to make you miss Ed Zander, Sun's former and boisterous president during the dot-com days.

In the first fiscal quarter, Sun's product sales fell 32.7 per cent, to $1.19bn, while services revenues fell 13.9 per cent, to $1.06bn. Sun slashed its operating expenses by nearly a third, basically as it let go of employees and pulled back mightily on sales, marketing, public relations, and other efforts to peddle and promote products as well as its vaunted research and development, which accounted for only $354m in the quarter, down 16.3 per cent.

Those cuts are what allowed Sun to book a net loss of only $120m. But perhaps more significantly for an anxious Oracle, Sun's cash and equivalent hoard fell 16.7 per cent from the June quarter, to $2.38bn. This has the effect of making the Oracle offer more expensive.

As Sun has been doing for the past year, the company put together a presentation that shows Sun's billings for the quarter by product line. Not all of the billings make it in as revenue during the quarter, but most do. This is the best indicator of performance by product line that Sun has ever given, and honestly, it is the most detailed presentation that any IT vendor has ever given.

So when Schwartz and Lehman said they wanted Sun to be more transparent financially, they really meant it. I just think they had hoped the numbers would be better, and the transparency more helpful in boosting Sun's stock. Lucky for them, Sun's shares are held more or less in limbo despite whatever is going on in Sun's business because of the Oracle deal. If that were not the case, Sun's shares would have been hammered into the ground by now.

Sparc tumbles

Sun said that its Sparc Enterprise servers accounted for $343m in billings in the first quarter of fiscal 2010, down a whopping 40 per cent. This is a far more dramatic decline in high-end server sales than either IBM or Hewlett-Packard are seeing - worse even than mainframes, and by a wide margin at that. (IBM's mainframe revenues were down 26 per cent in the same three-month period).

Sun's "Niagara" family of so-called CMT servers, which use the Sparc T series of multicore and multithreaded processors, slipped 20 per cent to $272m, and x64-based "Galaxy" servers had a 10 per cent decline in billings to $159m in the quartr. Other systems accounted for $50m in billings, and the grand total of $824m in system billings was off 34 per cent compared to Q1 of fiscal 2009.

Sun said that its overall server shipments were down 41 per cent in the quarter, to what looks like around 48,000 units or so in Sun's presentation. The company's x64 servers had a 30 per cent decline, to what looks like around 24,000 units. To make these rough numbers work out, that has to mean that Sun's Sparc-based server shipments had to fall by 49 per cent, from 47,000 units a year ago to 24,000 units in this quarter.

That is truly awful, and the cowardly way that Sun killed off the Rock chips and has yet to explain its Sparc product roadmap to customers in the wake of that death is no doubt undermining confidence in Sparc shops. So is the rather unimpressive Sparc roadmap that Sun shared with selected customers back in June. Sun's hardware business needs a fire lit under it - and soon.

On the software front, Sun's Solaris licensing (as distinct from Solaris support contracts and applying only top products that have not been open sourced) and management and virtualization tools together accounted for a mere $24m in billings, down 38 per cent. MySQL database software accounted for $53m in billings, up 2 per cent, and Java licensing accounted for $54m, up 57 per cent. (I would bet this Java licensing bump came from Oracle, but who knows?) All told, software billings were up 6 per cent, to $131m. When you take out $93m in adjustments for inter-group sales and for billings that did not book in the quarter, you get $862m in systems revenues.

Sun has been breaking out billings for its storage products separately in this presentation, and said that disk and storage arrays saw a 37 per cent decline, to $196m, in the first quarter. The much-ballyhooed open storage products accounted for $35m in billings, up 40 per cent, but much less than the $51m billings in the fourth quarter of the prior fiscal year.

Open storage has to do a lot better, just like CMT and x64 servers have to do, if Sun is to survive either as part of Oracle or as a standalone company. Tape product billings fell 25 per cent, to $140m, and other storage accounted for a mere $4m in billings. After $50m in adjustments, storage accounted for $325m in revenues during the quarter.

On the services front, hardware and software support (including support for the freely distributed Solaris 10 Unix), accounted for $852m in revenues, down 12 per cent, while professional and educational services made up $204m of sales in the quarter, down 22 per cent.

Sun exited the quarter with stronger gross margins, $1.84bn in its product and services backlog, and $2.8bn in deferred revenues. Product deferred revenues were up 15 per cent in the quarter, while services deferred revenues were down 5 per cent. The company had a mere $589m in long-term debt. In other words, this is a business that can be stabilized at around $12bn a year in sales, and possibly profitably.

It is hard to imagine how on earth Oracle will be able to extract $1.5bn in profits out of Sun in the first 12 months after the deal closes, and then $2bn a year after that. It is a rare, rare IT hardware vendor that can bring something on the order of 17 per cent of revenue to the bottom line, and to do so required the kind of legacy lock in that IBM has with mainframes and AS/400s. Perhaps Oracle sees the same kind of growth potential Sun always did?

On a geographical basis, Sun said that its sales in North America fell 19 per cent, to $986.9m, and sales in Europe were slammed down 29 per cent, to $672.9m. Emerging markets were down even further, falling 33 per cent, to $314m, and Asia/Pacific had a 23 per cent decline, to $269.1m. ®