QUOTE AND NEWS
SeekingAlpha  Jan 27  Comment 
By Trefis: In January 2010, software developer Oracle Corp. (ORCL) completed its acquisition of Sun Microsystems for approximately $7.3 billion. With the acquisition, Oracle entered the enterprise server and storage hardware businesses to...
DailyFinance  Jan 20  Comment 
SAN FRANCISCO, CA -- (Marketwired) -- 01/20/14 -- Bluebox Security, a stealth mobile security company, today announced it has closed an $18 million Series B funding round. Participants in the round include Tenaya Capital as well as existing...
Cloud Computing  Jan 15  Comment 
DataStax, the company that powers the online applications that transform business, today announced it has hired Clint Smith as general counsel, responsible for the company's legal affairs, including corporate law, intellectual property strategy,...
Financial Times  Dec 18  Comment 
Figures helped by reduction in losses from hardware sales, which have been a drag on results since acquisition of Sun Microsystems four years ago
Benzinga  Sep 17  Comment 
Scott McNealy, chairman of Wayin and infamous co-founder of Sun Microsystems, had a chuckle when he said that he sent Twitter's CEO Dick Costolo condolences and congratulations at the same time while he was a guest host on CNBC's Squawk Box...
TechCrunch  Sep 11  Comment 
Vinod Khosla, one of the co-founders of Sun Microsystems who later went on to create Khosla Ventures, says that the vast majority of VCs aren’t in a position to offer decent advice to startups. In fact, most of them probably hurt startups, he...
Cloud Computing  May 4  Comment 
ForgeRock, the pioneer of open source identity and access management, will hold its first Open Identity Summit June 12-14 at Asilomar Conference Grounds in Pacific Grove, California. The conference will explore solutions to...
Cloud Computing  Apr 17  Comment 
I’ve been watching the incredible team of mission-focused technologists as form Cumulogic since my friend Bill Vass alerted me to their virtuous computing approaches in early 2011.  Since then they have provided many updates on their website of...
New York Times  Mar 18  Comment 
The Surfrider Foundation, a coastal protection group, claims in a lawsuit that the owner of a beachfront property near San Francisco has cut off access to Martin's Beach, reports PE Hub. The article cites "a person familiar with the matter" who...




 

Sun Microsystems (NASDAQ:JAVA) provides network computing solutions, including computer systems, data management products, and other services. Server and workstation sales, and accompanying support and educational services, constitute the bulk of the company's revenue. Although Sun now offers systems in all segments of the market, it has traditionally provided high-end to mid-range servers for a premium. The industry shift toward less expensive and also less profitable low-end servers, along with fierce competition from IBM, HP, and Dell, may negatively impact Sun's profit margins.

Sun is a major proponent of open source software. It has open-sourced both Solaris, the leading Unix operating system, and Java, a popular development platform. Sun has also bought open source database software company MySQL for $1 billion in February, 2008. By giving away its software for free, Sun hopes that increased user adoption will lead to increased hardware sales and accompanying service revenue. Nevertheless, it is currently unclear how effective this open-source model will be in increasing profitability.

The company spends significantly more as a percentage of revenue on research and development than competitors. Although research may provide future benefits, increased costs have forced the company to take significant measures to to return to profitability; in 2006 the company posted an operating loss of $870 million, but in 2007 returned to profitability with an operating income of $309 million. Sun has announced plans to reduce its workforce by 5,000, or 13%, in order to save $500 million annually. This reduction in workforce comes at the tail end of a years long restructuring. The company has also seen 11% growth in the revenues the revenues derived from its China division. If Sun's 2007 profit of $473MM is any indication, the company's fortunes seem to be taking a turn for the better. The question that any investor must ask is whether Sun's continuing focus on innovation and cost-cutting will be enough to offset the continuing pricing pressure in the company's core markets.

Corporate Overview

Customers

As both a computer hardware and software company, Sun focuses on providing high performance reliability to mostly enterprise customers in telecommunications, manufacturing, financial services, and Internet-related companies. Sun's offerings include servers, workstations, data management solutions, and support services. In the past, the company has focused mostly on high end systems. Its flagship UltraSparc processor-based systems cost up to millions of dollars, and are used for mission-critical applications. However, the company's new products appeal to low-end markets that emphasize low-cost and standardization of systems.

General Electric is Sun's largest customer, and was responsible for 11% of the companies sales in 2006. No other customer was responsible for more than 10% of the companies sales.

Error creating thumbnail

Business Segments

Computer Systems

Servers and workstations drive Sun's revenues both through direct hardware sales and indirect services.

Sun offers Sparc systems based on its proprietary UltraSparc processors, which comprise 85% of the company's system sales and 90% of system profit. Sparc systems use Sun's Solaris Unix operating system. These proprietary systems have a reputation for reliability, but also come at high hardware and support costs, and are geared toward the high-end and mid-range segments of the market.

In 2004, Sun canceled development of the next generation of UltraSparc products, and instead announced a strategic alliance with Fujitsu to produce a "Advanced Product Line" (APL) series. Fujitsu provides the design for the main processor and high-end chassis, while Sun only provides the design for the mid-range chassis. Because the companies divide profit based on relative design contributions, the arrangement will likely be much less profitable for Sun compared to its existing UltraSparc lines. The first APL products were released in April 2007. Although the details of the agreement are not clear, it is thought that Sun came to the agreement to fill a gap in its product road map, and that after the two-year binding contractual obligation is over, Sun will unveil its own system called "Rock" that combines the UltraSparc and Niagra (see below) architectures.

Sun began to produce its Galaxy line of servers in 2003, which are industry-standard x86 systems based on AMD's Opteron processors, running Windows or Linux. This meets an increased demand for standardization in the IT industry, which lowers operating and support costs. x86 systems currently represent a small but growing part of Sun's server sales. However, these lower-cost servers are naturally less profitable, representing 7% of server sales but only 3% of gross profit.

Sun has released a new line of computer servers named Niagara, which promise high-throughput and low-power consumption. Niagara systems are competitively priced for the low-end market, and run primarily on Solaris. This new lineup represents Sun's attempt to regain share in the growing market for low-end servers.

Software

Sun develops Solaris, the leading Unix operating system, and Java, a popular programming language and interface that allows cross-platform and web portability. The company has open-sourced both Solaris and Java, hoping that increased adoption of its software will attract more hardware and service revenue. Going along with that mindset, Sun bought open source software company MySQL for $1 billion in February, 2008. MySQL is the market leader in open source database software. Although Sun's pure software division (which does not include storage software) no longer contributes directly to revenue, Sun remains focused on its software offerings as a central part of its business strategy. (See Open source software)

Data Management

Sun also provides a variety of data storage solutions to mostly enterprise customers. Sun packages its own resource and file management software with Hitachi disk storage hardware, and then sells it to the high-end market. The company also sells mid-range and entry-level disks in its StorEdge line, as well as networked storage hardware and management software.

Despite the prevalence of optical disks and hard drives, tape remains the preferred medium for for long-term storage for enterprise customers. In 2005, Sun acquired StorageTek, a tape-drive manufacturer. As a major acquisition valued at $4.1 billion, StorageTek significantly expanded Sun's data-storage portfolio, adding tape libraries, drives, virtualization systems, media, and software.

Services

Hardware requires maintanence and educational support. Hardware sales produce a steady stream of income through profitable service contracts. Support contracts are sold both separately and packaged with hardware, as well as in subscription form. Sun provides support to nearly 850,000 computer systems worldwide. In addition, Sun provides training and consulting services for its customers. Unlike product sales, which are fiercely competitive, companies generally service their own products. However, services revenue is indirectly influenced by hardware sales, as increased product adoption leads to more service contracts.

Internal Drivers

Product development and proprietary technology

Developing a new technology or product can be a time consuming and expensive process. Compared to its competitors, Sun is more research-oriented, spending a significantly larger fraction of its revenue on research and development than competitors. In 2007, Sun spent 14.5% ($2.0 billion) of its total revenue on research and development, while HP spent 3.5% ($3.6 billion) and, in 2006,Dell spent only 0.8% ($463 million) of its total revenue.

There are both advantages and disadvantages to research and development. Developing new products allows the company to differentiate itself from competitors in the market. Sun actively develops its own software, and as a result, has a monopoly on providing profitable software support services. In addition, proprietary research makes unified processor architectures such as Sun's SPARC processor family possible.

On the other hand, increased research and development spending further raises operating costs, decreasing profit margins. The competitor Dell, for example, relies less on proprietary technology and more on off-the-shelf parts. It is uncertain when or whether Sun's research investments will pay off in the future.

Restructuring

In an effort to reduce operating costs, Sun announced that it will reduce its workforce by 5,000, or approximately 13%. This is expected to generate annual savings of $550 million. This comes at the tail end of a years long restructuring which also encompasses the closing of several locations, and a reduction in other operating costs. It is important to note however, that this restructuring in not without its own costs. Sun paid $138 million in restructuring costs in 2006 and has incurred more than a billion in charges since 2003. These restructuring charges combined with Sun's already high cost structure, and a change in accounting policy resulted in negative operating income in 2006.

Sun's restructuring efforts and cost minimization strategies have helped the company achieve its first full year of profitability since the dot com bust. First quarter fiscal 2008 net income was $89 million with a 48.5% gross margin, up 5% from a year ago.


Trends and Forces

Open source software

Open source software forms the heart of Sun's new business strategy. Sun has open-sourced its two most important pieces of software, the Java software-development platform and its Solaris operating system. Sun has also bought MySQL for $1 billion. MySQL is the market leader in open source database software with an 80% share of the global market. By giving away open source software, Sun is hoping to attract more customers for its hardware, software maintenance, and other services businesses. Sun can package MySQL with its other software (and sell some hardware and storage, to boot), with the effect that the database can drive the sales of operating systems, middleware and perhaps even tools. what the fak This could go on to hurt many of its competitors IBM, Oracle, MSFT, Sybase, RHT. Sun has had to pay a lot for MySQL (a lot more than if they had taken a large position in the AB two years ago). And for their investment, they get an installed base. Sun says MySQL has millions of global deployments including Facebook, Google, Nokia, Baidu and China Mobile. However, there is no guarantee that this model will be successful in generating additional revenue.

Shift toward lower-end systems

The industry is experiencing a shift from relying on fewer high-end servers to networked clusters of less-expensive, low-end servers. Low-end systems allow standardization and the use of off-the-shelf parts, further decreasing costs.

Sun has largely been negatively affected by this trend, as it has tended to focus on proprietary technology and high-end systems. However, there has been a recent push toward regaining share in the low-end market, specifically with its new Niagara technology.

China and Asia revenues growing fast

Sun Microsystems 2007 revenue- for fiscal year ending June 30th- in APAC (Asia, Australia, and New Zealand) was $2.73B (11% greater than the previous year). This is in comparison to an overall growth rate of only 6%. China was a major contributor to the growth of Sun's Asia revenues. Currently, the country is Sun's second largest Asian market, behind Japan. Sun is confident in its ability to double China revenues over the next three years, making it the company's largest Asian market. The company plans to achieve this growth by forming strategic partnerships with local resellers and the Chinese government. The former would entail allowing local Chinese companies to sell Sun products under the Sun name.

Comparison to Competitors

Server Competitive Landscape

 

Sun

HP

IBM

Dell

Intel/AMD

Microsoft/Linux

MPU

HW

SW

MPU

HW

SW

MPU

HW

SW

MPU

HW

SW

MPU

HW

SW

MPU

HW

SW

High End

(> $500K)

X

X

X

X

X

X

X

X

X

 

 

 

X

 

 

 

 

X

Mid-Range

($25K - $500K)

X

X

X

X

X

X

X

X

X

 

 

 

X

 

 

 

 

X

Low End

(<$25K)

X

X

X

 

X

 

 

X

 

 

X

 

X

 

 

 

 

X


Sun is the only company that has significant market share in all portions of the processor (MPU), hardware (HW), and software (SW) markets. Although Sun faces competition in all segments of its business, no competitor matches Sun's breadth of products. Intel and AMD produce only processors, while Microsoft and Linux are exclusively software. Dell produces only low-end hardware. Competitors HP and IBM most closely match Sun's product offerings. Note that although HP and IBM do have low-end MPU and SW products, which is not reflected on the table, their market shares are shadowed by the other major players.

In first quarter for fiscal 2008, Sun announced that it will be working with competitors IBM and Microsoft. IBM will allow Sun's Solaris operating system to be run on IBM servers. Microsoft will be installing Windows operating systems on Sun machines. Sun hopes that these relationships will raise its product awareness and reach in the market.

By purchsing MySQL for $1 Billion, Sun has found a database which it can package MySQL with its other software (and sell some hardware and storage, to boot), with the effect that the database can drive the sales of operating systems, middleware and even tools. Sun could far better attract developers to a data services fabric efficiency than with its tools-middleware-Solaris stack alone. They get an installed base of millions of global deployments including Facebook, Google, Nokia, Baidu.com (BIDU) and China Mobile (Hong Kong) (CHL).


Relative to its competitors, Sun is a high-overhead company that needs a higher margin premium to break-even. Although its servers have a reputation for reliability, the company is faced with intense pricing pressure from many competitors in all segments of the market.

2006 Server Market Dell HP IBM Sun Microsystems
Unit Shipment 21.7% 27.5% 15.7% 4.5%
Revenue 10.3% 27.0% 32.1% 10.8%

Note from the table that Sun's revenue share is significantly higher than its unit shipment share. This reflects Sun's relatively stronger focus on high-end systems. In contrast, note that this is reversed for Dell, a low-end systems manufacturer.

In the high-end and mid-range markets, Sun's two largest competitors are IBM and HP. IBM continues to upgrade its popular Power 5 line of servers, while HP had recently released its servers based on the Itanium processor. Aggressive pricing coupled with new competitor products put pressure on Sun's growth prospects in the heart of its server business.

In the low-end market, Sun's Galaxy and Niagara systems have been well-received. These systems popularity have been driven by their greater power efficiency relative to their competitors. This advantage was largely bases on the fact that IBM, HP, and Dell were selling systems bases on outdated processors. They are now rolling out their own servers based on the power-efficient Opteron architecture in the near future.

Sun's primary competitor in its storage business is EMC, which also provides high performance disk drives and networked storage solutions.




2007 Performance metrics

Company Total Revenue (mm) Gross Profit (mm) Gross Profit Rate Operating Income (mm) Operating Margin 2006-2007 Revenue Growth
IBM $98,785 $41,728 42.2% $13,515 13.6% 8%
Hewlett-Packard $104,286 $25,399 24.3% $8,719 8.3% 13.8%
Dell $61,133 $11,671 19.1% $3,440 5.6% 6.4%
Sun Microsystems $13,873 $6,256 45.1% $473 3.4% 6.1%

References

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki