Tuesday Jan 29, 2008

Free Virtualization, and Sun's Q2 Results

Please read the luculent Safe Harbor Statement at the bottom of this page....

We released our official earnings on Thursday last week, after pre-announcing the news one week prior alongside the announcement of our intent to acquire MySQL.

Our second quarter financial announcement came down to this: we doubled our profitability compared to a year ago, with $260 million in net income on revenues of $3.6 billion, while generating $336 million in cash from operations. We also repurchased $750 million of our own shares within the quarter, and reaffirmed our guidance for the full year of low to mid single digit revenue growth, and at least 8% operating profit for Q4 (excluding any acquisition charges).

From a financial perspective, with the glass half empty, total revenues were up only slightly (just over 1% vs. a year ago). This was partly due to changes in how we do business with our resellers and channel partners – we'll be reporting revenue when there's a sale to an end user customer, not when we've fulfilled an order from a business partner that sells to end users. (This makes us more transparent, too.)

Those changes took a few percentage points of revenue growth off the top line, and were one reason for the disparity between our bookings growth of 7%+ (bookings are orders for delivery within the next six months) and our revenue (orders fulfilled/installed within the quarter). With the glass half full, this generated a very healthy “book to bill” ratio, which investors look to for insight into future performance. Our total deferred revenues (products and services) also ballooned considerably, growing 24% year over year, to almost $2.7 billion. A very healthy increase.

What were some of the strategic highlights within the quarter?

Topping the list was the interest in Sun xVM. xVM is our free, open source virtualization platform, which we unveiled at Oracle Open World, alongside our management platform, xVM Ops Center. xVM will virtualize Windows, Linux or Solaris, on either Dell, HP, IBM or Sun hardware. We've seen broad interest from across the world, especially from customers that want to avoid putting a proprietary virtualization technology at the base of large scale open source datacenters (“why go back?” one said to me). Interest in our virtualization story (from xVM to Solaris containers) expands to every industry, and nearly every customer – it's just about the number one item on the agenda.

Next on the list was signing a Solaris OEM deal with Dell, through which they've endorsed and will support Solaris across their server and blade platforms. This was a very big deal for us – an endorsement from the volume leader in PC's and commodity infrastructure matters to our customers. Michael joined me on stage, and politely invited me to join Dell's “Regeneration” (an offer I gladly accepted in exchange for a t-shirt). Dell joins IBM and Intel as Solaris OEM partners. Personally, I'd love to add Hewlett Packard to the list of partners our customers can rely upon for Solaris support.

We saw double digit growth in emerging economies, from India, China, Latin America, to portions of Eastern Europe and the Middle East. We saw booming growth in our UltraSPARC T2 Niagara platform, generating approximately $285 million in billings, 100% higher than a year ago. 100% growth! Why's it growing so fast? A focus on eco-efficiency, on outright raw performance, integrated (ie., free) virtualization and crypto support - we see opportunity emerging every day. With the acceptance of SPARC and Solaris 10 as open platforms driving new conversations and opportunity (with our existing, and new customers - if you'd like to try a Niagara 2 (officially, a T5120 or T5220) system for free, click here).

Our x64 business was relatively flat within the quarter – which was a low point, certainly. But we're just now introducing our new Intel offerings, and starting to build out our blade offerings. So I've got more confidence heading into the back half of the year, and with a bulked up product line that continues to expand and evolve.

We also saw growth on the very highest end systems we jointly build with Fujitsu. We're seeing those systems perform at or above our internal benchmark estimates, and we couldn't be happier with the strategic progress Sun and Fujitsu are making as partners. Speaking of partner relationships, we saw good growth in our Hitachi high end storage offerings, alongside growth in our core tape business. As predicted, we're seeing growing interest in tape as an archive platform among web companies that must preserve very large pools of data (user generated photographs and movies, eg.) for long periods of time. Where “large pools” are tens of petabytes, growing to hundreds). Alongside growth in our enterprise business, we also saw good growth from our Services business.

What's my view on the economy? Having spent my undergraduate years studying the dismal science, I can say with complete confidence, “no one knows with certainty.” What do I hear from customers? That they're increasingly turning to technology to drive efficiency, automation, and growth. And we're a central figure in that conversation, far more central than a year ago.

In addition, we just held an event with 150 or so of our business partners from across the world – evenly split across Europe, the Americas and the Asia Pacific region. And what did I hear from those partners? That's confidential, of course, but there's a reason we're all holding champagne glasses. We're hoping to make a habit of toasting success.

To the partners that joined us at the event - thank you for the partnership. We are committed to growing our opportunity, and the value of our relationships. There's a world of opportunity in front of us, and we're looking forward to capturing it together.

____________________________________________

Safe Harbor Statement
Jonathan's blog contains forward-looking statements regarding the future results and performance of Sun including statements with respect to Sun's guidance for revenue growth for FY08 and operating profit for Q408, Sun's strategy and business opportunities and expectations regarding our x64 business. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors that could cause actual results to differ materially from those contained in such forward-looking statements include: risks associated with developing, designing, manufacturing and distributing new products; lack of success in technological advancements; pricing pressures; lack of customer acceptance of new products; the possibility of errors or defects in new products; competition; adverse business conditions; failure to retain key employees; the cancellation or delay of projects; our reliance on single-source suppliers; risks associated with our ability to purchase a sufficient amount of components to meet demand; inventory risks; and delays in product development or customer acceptance and implementation of new products and technologies. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2007 and its Quarterly Reports on Form 10-Q for the fiscal quarter ended September 30, 2007. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements. If you've read this far, you need more outside interests.

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Comments:

"We saw booming growth in our UltraSPARC T2 Niagara platform, generating approximately $285 million in billings, 100% higher than a year ago. 100% growth! Why's it growing so fast?"

Because it would still be 100% on just a single unit shipped - the T2 was only released this year.

Nevertheless, a very impressive platform.

Posted by kwatson on January 30, 2008 at 12:09 AM PST #

Has the late shipping of a quad core from AMD affected x64 sales?

Can I have an outside interest please?

Posted by Andy Paton on January 30, 2008 at 12:52 AM PST #

No note about the Blackb^WModular Datacenter launch? I guess that's this quarter, not last quarter.

Posted by James on January 30, 2008 at 01:52 AM PST #

You spent a billion on MySQL, why not spend a million or so and invest in free PV drivers for Windows. You could even build this into your support model: free for opensolaris community users and paid-for it a corporate wants support.

This would really shake out the virtualisation market, as apart from management tools they really reason to buy commerical virtualisation support is PV drivers from Windows. Plus you would create some exciting from the community which would reflect in management tools being design for the xVM platform.

Posted by Nicholas Lee on January 30, 2008 at 03:01 AM PST #

Congratulations on all your successes within the last year, particularly the news about Sun xVM and the widespread adoption of UltraSPARC T2. I'm still somewhat saddened that donations of hardware to 'popular' Open Source projects has come to an end despite profitability being up though; receiving a T2000 and link from sun.com/servers/coolthreads/tnb/linux.jsp was fantastic, and it's a shame that's not happening with T5220 systems too :(

Posted by Alex Howells on January 30, 2008 at 05:22 AM PST #

Come on now... "If you've read this far, you need more outside interests." :)

No comment.

Posted by Toby Getsch on January 30, 2008 at 10:09 AM PST #

"Please read the luculent Safe Harbor Statement at the bottom of this page...."

Now there's a word you don't see every day.

Posted by Charlie (Colorado) on January 30, 2008 at 10:11 AM PST #

luculent...Big kudos for that word alone

Posted by J Gonzalez on January 30, 2008 at 12:48 PM PST #

Luculent actually means clear, concise.

Hey Jon, that 3rd picture look's like you are really having a great time!! 8>)

Posted by Bill W on January 30, 2008 at 04:40 PM PST #

Don't forget good growth in Sun's midrange disk systems!

Posted by Taylor Allis on January 30, 2008 at 05:44 PM PST #

Any chance that this virtualization could be used on my mac so I can run windows, solaris, and OS X. Than all of those users will be somewhat familiar with the product and potentially use it in their environment at the office as well?

Posted by anonymous on January 30, 2008 at 06:38 PM PST #

You bought back $750 million worth of shares last quarter and now have only $800 million left on the current share purchase authorization.

When will we hear that the Board has increased the share buyback authorization? You could be paying a lot less per share now than you paid last quarter - what with the dramatic fall in share price.

Posted by Daniel on January 31, 2008 at 05:52 AM PST #

Re: Flat sales of x64 line...

Maybe offer Windows Server on these out of the box (as per Sept 12 2007 announcement)?

And, maybe even offer pre-configured virtualised options (via xVM and Ops Center)? It'd be great to be able to have Solaris and Windows (and even Linux) in user-defined combinations, all running together on a single box... out of the box... Seems to me that Sun is well-positioned to offer this kind of thing at an amazing price.

Posted by Simon Brocklehurst on January 31, 2008 at 07:26 AM PST #

I'm really a friend of Sun, but to say billings increased 100% in UltraSparc T2 Niagara when that wasn't even billable a year ago appears a little dubious to me. Why did you say only 100%, you could have sold it to us as infinity, because any percentage increase from 0 is infinite.

And stock repurchases are a often a bad sign ... and reverse stock splits are often a bad sign ... and slumping stock prices are a bad sign ... and all three together can't make me swoon with mouth agape in awe. I am all in favor of long-term financial strategies over short-lived puffery (therefore I don't consider temporarily low stock prices a problem, but then the "massaging" with repurchases and reverse splits shouldn't be necessary either), but I hope the executive decisions, which I'd like to summary as "laying the seeds for the future", will eventually pay off. You have to ensure the seeds will really grow, and you have to defend your seeds vigorously, because in this business your competitors will try to destroy your seeds.

Posted by Chewbacca on January 31, 2008 at 09:55 AM PST #

<i>///In addition, we just held an event with 150 or so of our business partners from across the world – evenly split across Europe, the Americas and the Asia Pacific region</i>

What would have been awesome would be having all three continents meetings held the same time and each streamed live to others

Imagine the day when streaming conference technology becomes so advanced that virtual meetings with all the partners could be held every month.

We are looking at the next decade or two with extreme broadband, high computing power and huge screens being mainstream.

Posted by Silicon Valley on January 31, 2008 at 01:37 PM PST #

first: Sorry for being totally offtopic.

You have probably noticed that Nokia has acquired Trolltech with Qtopia Core. Now Motorola announced that they are taking into account to separate their Mobile Devices business. I wonder if Sun is considering to buy it from Motorola.

Posted by Martin Walch on January 31, 2008 at 05:34 PM PST #

Um... he says pretty clearly the Niagara business overall grew from 140m or so to 280m - not just the new systems that weren't shipping a year ago. That's obviously 100% growth, that's what he's talking about.

Posted by Shareholder on January 31, 2008 at 06:09 PM PST #

great tips

Posted by popbattery on January 31, 2008 at 07:54 PM PST #

To Chewbacca and other frustrated shareholders: We get it, and there's now no question that Jonathan gets it: Tactics deployed to pump up the share price are a "bad sign". But don't be ahistorical about it: All of that points to where SUN has been. Not where it's going. Moreover, he had no choice: The reverse split & share buy-backs are critical parts of the foundational AND psychological re-build that Jonathan is executing. Unless you understand what happened to SUN in terms of both business and the company's perception on Wall Street, a mere 8 years ago, in the crash, you can't possibly understand the share price now. Bottom Line, Sun is dead money short term, because Wall Street knows nothing about tech, and will never push a company or a sector it doesn't understand. When SUN starts to post "sexy" numbers again, they'll come back, running, and we'll all make money. Count on it. That's what happened with SUN in the mid-nineties, and history never fails to repeat.

Posted by Patrick on January 31, 2008 at 09:24 PM PST #

Nokia and Trolltech are on a downward slide. Nokia signed a partnership with Siemens. The lay offs have started already and everyone knows this is just the beginning. The disassembling has just begun. Siemens does not innovate or renovate.

Posted by Anonymous Coward on February 01, 2008 at 12:37 PM PST #

Sun is moving toward strong growth, innovative products and open software, customers are taking notice.

Posted by Peter on February 01, 2008 at 09:59 PM PST #

Any chance that this virtualization could be used on my mac so I can run windows, solaris, and OS X. Than all of those users will be somewhat familiar with the product and potentially use it in their environment at the office as well?

Posted by ilan on February 02, 2008 at 06:15 AM PST #

Its heartening to read that Sun bought a billion and then 750 million dollars worth of stock in the latest quarters. The Stock Market has not apprecated it yet, but it will. Herb Greenberg's column, the Weekend Investor, found "Credit Woes in Unlikely Places" in todays's Wall Street Journal. The article describes Bristol Meyers Squibb embarassment in reporting a loss in "cash" securities. It was not cash, but sub prime investments! Boy, must they feel stupid. Keep on buying back your stock, especially at today's give away prices.

Posted by Vincent on February 02, 2008 at 08:10 AM PST #

Sun, unfortunately, won't be taken seriously until they move into the consumer market. The consumer is waiting for Solaris Home Edition. Will Sun and Jonathan deliver it?

Posted by FutureSunConsumer on February 02, 2008 at 08:58 AM PST #

To Patrick: I take it that I can understand the gist of what you write is more or less confirmatory of what I wrote? You understand that what I wrote expresses my hope that with "laying the seeds" everything in this risky strategy is done right (not negative criticism)? Great, but then I'd still have to disagree with you on two items: if share buy-backs and reverse stock splits are even considered a "critical" part of the strategy (as you wrote), and if you claim that Jonathan had no choice, then things are even worse than thought. If you make share buy-backs and reverse splits a "critical" part of your turn-around plan, and from having been in the stock market for some 15 years, I can tell you that the markets rarely view them positive, you are really walking on extremely thin ice during your turn-around. There's even major market players at work that dump shares when they hear of such things, because they think "Oh Gosh, perception manipulation becomes necessary for them now!", which is negative perception instead of the "foundational" or "psychological re-build" you are talking about. Next, I'd have to disagree with you that history never failed to repeat itself. Then you don't understand history nor the stock market.

Posted by Chewbacca on February 02, 2008 at 01:00 PM PST #

Congratulation Sun!

Posted by Vrt on February 02, 2008 at 01:47 PM PST #

as a Sun employee, I love to read these interesting and thoughtful comments as much as I enjoy reading Jonathan's blog entries.

To Patrick: I think your analysis is, as the Brits say, "spot on". Or at least I hope it is because that is what I saw of what was going on in those "sexy 90's". I'm not up to my neck in Sun stock doing not much of anything, but many of my co-workers are.

FutureSunConsumer: Hang in there. Perhaps if there are no plans, something else will force their hand.

Posted by love these comments on February 03, 2008 at 08:00 AM PST #

My initial reply to FutureSunConsumer about the consumer space
would be that this is like asking Apple to be judged by its lack of presence
in the enterprise milieu. But then 'love these comments' intriguingly
counters that "if there are no plans [....] force their hand".

Actually, with the Java logo on every Blu-Ray player box, Sun does
OEM to the consumer, via Esmertec, who presumably accrues Java
royalties for passthru to Sun.

Nevertheless, since Sun and Apple are complementary peas-in-a-pod
with respect to innovation, the invisible hand of the market may beckon.

Posted by Retiarius on February 04, 2008 at 12:49 PM PST #

I wish good luck to sun corporation, cause i really like the sun community

Posted by Tworzenie Stron on February 04, 2008 at 10:54 PM PST #

Congratulations on Innotek - very nice buy. Please consider buying Caucho for it's Resin PHP Java technology. Time to get the 'P' in LAMP. They're a lot closer than Germany.

Posted by Kevin Hutchinson on February 13, 2008 at 05:15 PM PST #

Great! Congratulations Sun. Fantastic group

Posted by Jimeh on February 14, 2008 at 09:12 PM PST #

I would hate to own VMWARE stock right about now. Everyone is coming out with VM solutions.

Microsoft, Sun, Oracle, Citrix, Virtual Iron, IBM etc...

Posted by Tom on February 18, 2008 at 09:07 PM PST #

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