Analyst Conference Summary

Sun Microsystems

conference date: January 24, 2008 @ 1:30 PM Pacific Time
for quarter ending: December 30, 2007 (2nd fiscal quarter 2008)

Forward-looking statements

Overview: Not a bad quarter as Sun quarters go, with major improvement in profitability.

Basic data:

Revenues were $3.61 billion, up 12% sequentially from $3.22 billion and up 1% from $3.57 billion year-earlier.

Net income for the first quarter was $260 million, nearly tripling the $89 million in the September quarter, and almost doubling the $133 million year-earlier quarter.

EPS (earnings per share) was $0.31, up sequentially from $0.03 and up from $0.15 year-earlier.


Reiterating all guidance for fiscal year, but there will be a MySQL impact not in guidance.

Low to mid-single digit y/y revenue growth rates for fiscal 2008. Revenue growth in 2nd half will be at least 5%. Gross margins 45 to 47%. R&D + SG&A expense $5.7 to $5.9 billion. Stock-based compensation of $215 million to $240 million for fiscal year. Amortization $250 to $300 million. Interest and other income $160 to $180 million. Income tax provision $200 to $250 million.

Conference Highlights:

Sun management believes there is "accelerating demand set to fuel growth in the back half of the fiscal year." Profit margins improved and bookings were strong. Growth in China, India, and other emerging markets was at double digit levels. We saw strong demand despite uncertainty in the U.S. economy.

Momentum is being developed through Dell agreement to distribute Solaris and xVM platform. MySQL acquisition will also accelerate growth.

GAAP net income included a $32 million restructuring charge.

Product revenue was $2.25 billion, down 0.5% from year-earlier. Within that Computer Systems revenue was $1.594 billion, down 2.4% y/y. Storage products revenue was $655 million, up 4.6% y/y, with disk-based storage growing 7%.

Service revenue was $1.37 billion, up 4.6% y/y. Support service revenue was $1.047 billion, up 4%; educational and professional services revenue was $325 million, up 6.6% y/y. Support services pricing is becoming more competitive.

Gross margin was 48.5%, up 3.5% from year-earlier, but flat sequentially. Component price reductions were passed on to customers. Investing in sales opportunities.

Cost of sales was $1.86 billion. Gross margin was $1.75 billion. Operating expenses of $1.49 billion included R&D of $464 million, selling general and administrative of $995 million, restructuring and impairment $32 million. Operating profit was $262 million, interest income was $53 million, tax provision $55 million.

Cash and marketable securities ended at $4.677 billion. Inventories ended at $631 million. Cash flow from operations was $336 million. 36.7 million shares of stock were repurchased for about $750 million. $800 million of reauthorized buy-back remains.

Adjusted EBITDA $510 million, up $145 million from year-earlier.

Niagara systems stood out with over 100% growth y/y to $285 million. 11.5 million Solaris based licenses, up 65% y/y. 70% of those licenses were for hardware outside of Sun's own offerings. Infrastructure software sales grew over 12% y/y. Released a virtualization platform.

Growth remains the priority. Customer response to MySQL is very enthusiastic. Acquisition could close in Q3 of Q4. There will be an acquisition charge at that time.

Bookings and deferred revenues growth was very strong y/y. Customers are purchasing larger, more complex systems that require more services.

There was a 3% decrease in revenues y/y due to "switch to sellout" in the U.S. and Asia. EMEA switch to sellout will be completed in Q4. There was some benefit from exchange rates.

Revenues by geography: EMEA up 7%; Asia-Pacific up 2% (decreases in Japan offset strong growth elsewhere).


United States situation? We took out $120 million from channel inventory (switch to sellout). Macro picture depends on industries, with financial most conservative right now. Some sectors are seeing strong growth. Solid U.S. quarter overall.

Server unit growth? Some effect from channel inventory change. But customers are trending to more complex, SMP multi-socket machines. Trend will continue with blade servers and Intel processor-based systems.

Headcount reduction plan? 1500 number was a gross, not net number, and was within a range. Still lowering the count, but with growth opportunities that will offset planned reductions.

Seasonality of growth? Expect greater than 5% growth in 2nd half, but it will be partly in Q3, not just Q4 (fiscal quarters).

Storage OEMs? Open source file system looks revolutionary. We are building out our product line and are always interested in new OEM relationships when there is value for both parties.

Are your Q2 results causing you to back off growth estimates made at beginning of fiscal year? No, the bookings growth in Q2 indicates we are on track for guidance. We give a range because we are not seers, we go after as much market as possible.

High scale systems details? Main discussion now is Solaris availability on non-Sun hardware systems. That opens up new customers. Over 1000 new customers in quarter.

Galaxy family sales? Niagara? Did not see x64 growth we wanted, partly because of Barcelona delays and new Intel systems just coming in. But we are getting new customers. We think there is a lot of upside in x64 now that we have a full spectrum of products.

Energy efficiency and virtualization effects? Yes, with budget cuts virtualization and getting newer, lower footprint systems become more important.

Are we missing a coming slow down like we saw in 2001? That had its roots in 1998 and 1999 move away from Sun platform because we did not have the product the customers want. We are confident that our products are now what CIOs are looking for now.

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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 2008 William P. Meyers