Analyst Conference Summary

Sun Microsystems

conference date: April 24, 2007 @ 1:30 PM PT
for quarter ending: April 1, 2007 (3rd fiscal quarter 2007)

Forward-looking statements

Overview: Still stagnating. Very strong revenue guidance going forward.

Basic data:

Revenues were $3.28 billion, down 7% sequentially, but up 3.3% from year-earlier.

Net income was $67 million, down 47% sequentially from $126 million, but well up from a loss of $217 million year-earlier.

GAAP EPS (earnings per share) were $0.02 compared to a year-earlier loss of $0.06.

Sun has cash and equivalents of $5.486 billion.


Fiscal Q4 2007: see broadening market and new product introductions. Expect sequential increase 15 to 18% in revenues. Expect 42 to 44% gross margin. Tax $55 to $65 million. Fourth quarter goal is a 4% operating profit. $1.475 to $1.5 billion in operating expense.

For Fiscal 2008 expect single digit revenue growth.

Conference Highlights:

$2.06 billion was product revenue, up 1.2% from year-earlier. Within that $1.5 billion was in computer systems, up 1.8%; $550 million was data management or storage products, down 0.2%. $1.22 billion of revenue was from services, up 7%.

Gross margin was 44.5%, up 1.5% from year-earlier.

GAAP net income was imparcted by $50 million in stock-based compensation expense, $35 million restructuring, $75 million acquisition related expense, $54 million settlement, $8 million related tax effects, and a $5 million gain on investments. Overall effect was $0.02 per share.

$175 million cash was generated from operation.

$1.471 billion R&D and SG&A operating expense.

Pleased with quarter, but was seasonally challenging. Growing adoption for development platforms. Slow March was due mainly to slow U.S. and U.K.

Microelectronics group made a deal with Marvell for a complex interface. Software and services was best growth area. Now over 5 million Solaris licenses on non-Sun hardware. Embedded and Enterprise Java doing well. All this driving services revenue.

Disk-based storage had a difficult quarter. Tape did better. Computers did best in high-end Sparc, but weak in U.S. and U.K. Customers very insterested in energy efficiency.

Softening of orders was mainly in last few weeks in March; customers may be waiting for higher performance announced products and was mainly in UK and US.

Channel inventory was lowered by $30 million in the quarter. Component costs were less than expected. There was a negative impact from currency exchanges. But $0.01 better currency impact than year-earlier quarter.


Operating expense detail? Whether flat or not depends on whether you count restructuring costs. Looking at head count and processes for more savings. Expect reduction in fiscal Q4.

Server unit growth? Continuing to build low-end product line to get volume. In next product cycle and blade platforms units don't reflect increased number of cores. Need to focus on top line revenue growth, not just unit numbers.

Revenue guidance for June quarter? Need to execute to hit range, but has some confidence they can hit that. Network computing seasonality is usually up.

Galaxy? Just now launching M-class and Intel products. So some hesitation from customers in Q3 will result in sales decisions in Q4. But most business is Sparc based.

Cash use? Will be used to grow business. No current plan for share buy backs.

End of quarter weakness? Measured against our own internal plan. Mainly in systems business, a bit in storage. Saw some strength in telco, federal, and financial serices businesses. More in indirect channels than direct channels.

Storage weakness? Strength in tape archives. Disks dissappointed, but introducing Solaris based systems.

Mix effect on margins? High end server did contribute to higher margins. Software also helped.

Sparc units down 17%? IBM was negative 13% on I series, shifting to P series. In X64 we are gaining share. Blade offering will allow Sparc, Intel and AMD blades.

Microelectronic products? Decline in demand for special-purpose silicon. With Niagara we can deliver clients into larger software ecosystems. Key is finding networking ASICs and CPUs that can be used in other products.

Run rates for X64, Niagara? X64 and Niagara were both flat sequentially. Getting design wins from both legacy and competitors. Niagara 2 will be 64 threads and can run unmodified Solaris.

Inventory? Will probably take down channel inventory by another week.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers