Q3 Update

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


Another week of news behind us, I thought I’d put some of our announcements in context. Most importantly, our earnings announcement in the last week of April.


Was I happy with our overall performance? Yes and no. Yes, in that we grew and generated a GAAP profit. No, in that some, but clearly not all the metrics were where we wanted them.


Let’s start with the developer side of the world. We had good growth across our core developer properties – active users of NetBeans, Glassfish and Solaris all continued solid expansion (which is a nice prelude to our big event next week). As I’ve continued to state (and will do so forever), developers fuel the opportunities we monetize with products and services – but developers don’t spend money, they spend time and attention. If we win more of that than our competitors, we, and our community partners, win more of the future opportunity. Mindshare drives marketshare.


Now, from a financial perspective, revenue was below our internal plans, but gross margins were very good, above our plan – contrary to prior quarters, we saw strength in our software, services, high end systems and archive/tape businesses (all of which drive good gross margins). But we also saw weakness in our midrange server and disk businesses. So margin dollars came in where we wanted, but the unit counts (the numbers of items we ship – which has an impact on component costs, and similar to the developer world, future opportunities) were below our expectations. As we said in our second quarter, we expected Q3 to be a “seasonally challenging” quarter – that’s exactly what it was.


Following our results announcement, here were some of questions I heard:

Why was revenue below where we (and a consensus of financial analysts) wanted it? Is the US slowing down?


I’m not a big believer in excuses, we just didn’t deliver the revenue. But the US and UK were our weakest territories, and they, in combination, account for the majority of our revenues – so a slowdown there is hard to recover globally. Answering “why?” is our problem, not an economist’s or sub-prime mortgage pundit’s.


We did take more inventory out of the channel – $30m or so – which comes straight off the top line. But I’d rather invest our cash in growing our business, than filling a warehouse. Even if it has a short term depressing effect on the top line.


What about by sector?

Within the US, we saw strength in our federal government business. Our telco/media business did very well, too, and financial services was near its overall plan. Those three verticals, in combination, account for the majority of our US revenue. But our business in smaller, “general territory” accounts was slower than in prior quarters.


As an interesting (and unrelated) aside, I was in Nashville earlier in the week speaking at a big government conference, and had a chance to spend a little time with General James Cartwright – who told me he maintains an (internal only) blog. Think about that, a four star general, the individual with singular responsibility for US space operations, nuclear weapons, command and control, and that’s only a partial job description – maintains a blog. Why? “It flattens the org.” “Are comments open?” “Yes.” That’s courage.


How do customers feel about your products?

From what I hear, and what Gartner recently backed up, they feel better than ever about the competitiveness, innovation, and roadmap we’re presenting. Across the board. Our products are now demonstrably faster and more price/performant, from our mainframes down to our volume systems. Thumper’s defining a new category as Solaris builds its reputation as a storage OS, and continues to gain momentum and create partnering opportunities.


Where was business strongest?

Korea, Latin America and Australia were strongest, and showed significant double digit growth year over year. Largely from growing telecommunications investments, but also media/entertainment, and high performance computing wins.


What about by product group? Product segment?

Revenues for almost everything grew year over year with the exception of disk storage. We saw strength in our archive/tape business, and Thumper delivered another collection of great design wins (but admittedly small revenues). Our x64 business, where we’ve been focusing quite a bit, grew more aggressively in revenue than units- which is a shift we’d somewhat expected as we started delivering higher value/scale x64 systems. But it was a more dramatic shift than we’d planned (and one we’re hoping to balance – driving both volume and value). Our Niagara ultra-efficient servers delivered another solid quarter, growing ~100% year over year.


Our OEM Software business signed Java platform licenses with a few very high profile consumer electronics companies (who didn’t give us permission to reference them, at least in time for our earnings call) – which points to the continuing rise of Java (and RIA) on all network clients. And we added more than 200,000 employees to our Java Enterprise System subscriber base – an ingredient in the growth of our deferred revenue (14%, y/y).


What about April’s new product announcements – did they impact the quarter?

We announced a series of new products/offerings a couple weeks ago, and have been upgrading the product line across the board throughout the year. We finally announced the fruits of our collaboration with Fujitsu, and the tapeout (and just yesterday, the booting up) of our ROCK systems. We introduced Streamstar, our new platform for high-scale video delivery (more in a later update on Streamstar). We’re starting to preview our Niagara 2 systems (scheduled to ship early next fiscal year), and our newest Intel products are about to come on line.


Which is all to say, I feel great about our technology progress – did that roadmap disrupt revenue? It had to have some impact, there’s just no great way of quantifying it. Then again, I’d rather get new products announced and ramping, than keep everything a state secret and hope customers find out on their own.


What about 4% GAAP operating profit in Q4? Are you still committed?

In my view, we have to meet our investor commitments independent of economic climate. And that’s certainly our intent.


What about the 25th Anniversary Sale – what’s going on with that?


Among Sun’s biggest challenges is driving greater awareness of our offerings – so we’re doing a lot of things to recruit new customers and drive adoption of Sun technology. We know these prospects search for new products on the web first, and that’s primarily where we focu our efforts.


We have a Startup Essentials program, which targets very small/young companies with aggressive discounting (companies younger than four years old with fewer than 150 employees get extremely aggressive discounts, on a limited number of units); we’ve continue to build up our Try and Buy program, where any customer can simply request a product from Sun, fill out a form, and we’ll send it out for a free 60 day trial. And we just opened Network.com, the ultimate low-touch Sun demonstration, to a global audience. These programs are designed to be “channel friendly,” in that qualified lead data goes out to our channel partners, who see the program as air cover from Sun to drive our collective business.


But we blew it on the 25th Anniversary Sale – we did a poor job of making it “channel friendly” from the start, communicating with our partners. We were hazy on details around lead dissemination, credits and offer qualifications, and although we’ve been investing to grow our channel relationship, this didn’t come off that way. It felt like a slap. For which I apologize – our channel is an incredibly valuable asset, and like I said, we blew it here for the channel (although the customers I’ve spoken to love the promotion). And we’re going to make it up.


All that said, the 25th Anniversary Sale is a very tiny program – with strict limitations. And having seen the daily results, its biggest impact won’t be financial.


And finally, a question not asked by investors, but increasingly being asked about inside Sun,


What is Project Indiana?

I can’t tell you. Yet.


Why not?

Because Ian said it was a secret we couldn’t reveal.

________________________


And now, a note from our attorneys:


Safe Harbor Statement
Jonathan’s blog contains forward-looking statements regarding the future
results and performance of Sun including statements with respect to
Thumper, the Solaris operating systems, Sun’s expectations with respect
to balancing x64 revenue and units; the continuing rise of Java (and
rich internet applications, or “RIA”) on all network clients; our expectations with respect to when
Niagara 2 systems will ship and when our newest Intel products will come
on line; and our intention to achieve 4% GAAP operating profit in Q4.
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, 2006 and its Quarterly Reports on Form 10-Q
for the fiscal quarters ended October 1, 2006 and December 31, 2006.
Sun assumes no obligation to, and does not currently intend to, update
these forward-looking statements, except as required by law.



(And for those that’ve read this far, how ironic is it that the entirety of this blog entry was just placed into an 8-K filing I just signed for submission to our friends at the Securities and Exchange Commission for broad and fair dissemination to investors…)

28 Comments

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28 responses to “Q3 Update

  1. I feel that transparency and integrity are the key values of a company which will win faith of customers, employees and stake holders. I feel proud to see your Safe Harbor Statements, this is called transparency. I think as a small business owner for CREAGX, I have to learn a lot from this. I whole-heartedly appreciate this act. All the best for SUN’s growth. Congratulations for this sucess.

  2. Christopher Mahan

    >What is Project Indiana?
    >I can’t tell you. Yet.
    >Why not?
    >Because Ian said it was a secret we couldn’t reveal.
    I don’t like being teased.

  3. <“But we blew it on the 25th Anniversary Sale”> This was one of those rare cases where my friends who are Sun partners and those of us who sell used Sun hardware both felt blind-sided by Sun management.
    An old friend of mine who is on the channel side was pretty furious. He had spent months sizing out servers for a couple of clients, only to have them go around him to purchase directly from Sun with this promo. Our used Sun wholesale reps here have a bunch of “newish” boxes that we’ve been selling for more than these promo discounts, but at least it will be over soon.
    I told both my friend and my Sun guys not to worry though, because (as I suspect the “daily results” have shown) this brings more users into the fold for Sun, which ultimately means more Sun business for all of us.
    Congrats to the Sun users who took advantage of this promo and to Sun for 25 years in business.

  4. >I was in Nashville earlier in the week
    You didn’t happen to leave one of those Project Blackboxes around anywhere, did ya?

  5. surnish

    Love your blog. You might want to remove the double quotes at the end of the link for JavaOne so it points to the right place.

  6. FADO

    Execution = results without excuses. It would be nice to see more focus on execution and less effort trying to justify yet more revenue misses – but as a SUNW investor, I guess it’s just what we have become used to…

  7. Kevin

    Thanks for the network.com API (albeit in limited beta – how do I apply?) and the joyent.com on-demand computing partnership. These are both steps in the right direction. It feels like you listen and respond to feedback. Excellent.

  8. Will

    Blew it with the channel?
    I’ll let that one lie…..
    If I did’t know any better, I’d say sun is testing the “bypassing the channel take it direct” waters.
    And why not? Years of losing to obviously technically inferior products (in almost every way) has bred desperation within Sun.
    Sun has all its brains in innovation and few in dissemination……that’s the problem.
    100 X4600 lost due to channel red tape…….
    solaris-AT-cablespeed-DOT-com

  9. Greg

    I am very upset that Sun Management did not come out and back up the future of their business which seems to be very encouraging. You guided revenue higher I believe (15-18%) and Sun is a cash rich company (may have been a good time to buy back shares to show confidence in your future?) which once they figure it out will move the stock higher. I just think after so many years of you know what you owe your shareholders a little more??? Your response is appreciated!
    Greg

  10. In China, there’s a sentence: If you don’t know, your army will tell you.
    This is the 8th times that Bill come to China. what about SUN?
    I know SUN did lots of things and successed. But, you know, a good company should be living, aggressive, and comprehensive. Look, what Microsoft did. Maybe Bill doesn’t always right, but he must did something right.
    A present for you: Do you know what does “踩” mean? Bill knows.
    踩踩踩  踩踩踩   踩踩踩
    踩 踩踩踩  踩踩踩  踩踩踩   踩踩踩踩踩踩
    踩踩  踩踩   踩踩   踩踩   踩踩踩踩踩踩
    踩踩                  踩踩踩
         踩踩踩踩踩踩踩踩踩踩踩踩
       踩踩踩踩踩踩踩踩踩踩踩踩踩踩踩踩
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      踩踩踩踩踩踩

  11. Pierre Miller

    Great post Jonathan.
    However, let me comment a couple of things. Your marketing is the worst in the industry. Your messaging is unclear and undifferentiated to b-2-b customers. I wonder where you spend your big marekting budget – certainly not in europe. A change in your marketing approach and leadership would be needed to get better awareness in the market.
    You announced the new OPL products and are helping Fujitsu-Siemens gain ground in the sparc business. This is BS and will harm good customer relationships we are enjoying today with Sun as Fusi will definitely start FUDing around. Looks like the go-to-market approach is messy and not thought out — again a week marketing job!

  12. I would have loved to throw more money Sun’s way this quarter, but found it next to impossible, to be frank. See http://typo.submonkey.net/articles/2007/05/02/solaris-cluster-on-the-cheap-prologue for some of my gripes. And by the way, since it seems to be becoming more and more common, complaining to Sun by blogging about it shouldn’t be the best way of getting a response, either.

  13. well

    If NBT4% goal missed, who’d be responsible ?
    I guess nobody.
    Now you better “predict” other areas as weakest territories on Q4.
    Most of your strategies just won’t work. Ask the world:
    * Is Java the best framework for developer ?
    * Is Solaris the best platform for Java application ?
    * Is SPARC the best architecture for Solaris ?
    Sun can only survive when all 3 answers are YES.
    But my answer is NO NO NO.

  14. Comment NOT on Jonathan Schwartz’s blog, but on the required Safe Harbor Statement by Sun’s Attorney’s (who will have to say what they have said anyway:
    Sun is a bigger Microsoft in terms of the quality of its Operating System and its application software properties; Sun is an Intel to some extent in terms of its Sparc processor properties; Sun is a Lotus (whereever it has become a part of) in terms of its Star Office Suite property; Sun owns a platform grander than Oracle – Java; Sun is a Dell and HP in terms of its hardware line; Sun is larger than Coca Cola in terms of end user’s reach of Java. Sun is a sort of Google with its products such as Sun Grid. What is missing in Sun Microsystems that prevents Sun Microsystems from montezing to the extent of a decent fraction of the net earnings of Microsoft + Intel + Lotus + Oracel + HP + Dell + Coca Cola + Goggle ?

  15. Anantha

    Hopefully the last quarter serves as a notice to you and your staff that at the end of the day what matters is the top/bottom line numbers. All the peripheral things: Participation Age, Green computing, … don’t mean squat. The only ‘Eco’ I’m interested in is the Economy of running the T1 processors. Why in Gods name would Sun push the green/tree hugging agenda I don’t know. No customer of yours really cares (except the odd balls in Santa Cruz) about the Green computing that you’re championing, they do care about the Green (as in moola) computing.
    Position your products for the market, not social causes and political ambitions. Position them as products that save money for your customers, ’nuff of this tree hugging.

  16. It is very brave to place your thoughts behind an earnings quarter which the market reacted negatively to, and allowing comments to remain. Hat off to you for remaining consistent.

  17. retiarius

    Reminder for Anantha: Green as in “eco” and Green as in “moola” are not orthogonal.

  18. I just read about the huge layoffs that IBM are about to perform and about the corporate culture that appears to be slowly killing a once great company. How refreshing is Sun.
    @Anantha
    You obviously don’t pay your electricity bills.
    @retiarius
    You beat me to it but i still couldn’t resist.

  19. Sorry to be off-topic but in your entry for Tuesday Apr 10, 2007 (‘Rock Arrived’), you made a comment about “plain vanilla OpenSolaris”. I’d like to make you conscious of the fact that vanilla is not plain.
    It never has been and never will be. It is in fact a delicious flavour on par with chocolate and caramel. If you have been given poor quality vanilla ice cream as a child, I’m sorry – so was I at times. But good vanilla ice cream tastes just as nice as a good chocolate one.
    So strong is vanilla that you can barely see it in vanilla flavoured ice cream (it’s actually black for those few who don’t know). Contrast that with how much chocolate you need to make chocolate flavoured ice cream taste of anything.
    Comments were closed before I got a chance to say anything. Anyway, I wish you all the best for 2007!

  20. Insane

    No no no, Jonathan. Wake up. “Project Indiana” won’t save SUN. Ian won’t save Sun, just as Andy B did not. “Innovation” won’t save SUN. Great engineers won’t save SUN. “Exciting” new products won’t save SUN. Because the company is run by a bunch of incompetent executives who do not know how to run a consistent business operation.

  21. Kemp Watson

    Insane:
    We all have our issues with aspects of Sun; I’m sure the mgmt does too. Instead of wasting bandwidth here to trash the company, perhaps you could state your issues and constructively post your specific wisdom as to how you would ‘save Sun’. If not, perhaps you’d have the time to take a few lessons in collaboration and tact.
    – tree hugger and happy T1 owner, not from Santa Cruz (for Anantha’s benefit)

  22. If you couldn’t see that the 25th Anniversary Sale wasn’t going to cause a problem for your partners you are not quite the visionary I took you for. I massively admire your approach to the business but that has to be the biggest blunder Sun have made in years. How to alienate and distance yourself from loyal partners 101 – anyone could of seen it!

  23. Anantha

    This is in response to two posts/comments on my thoughts. I do pay electricity bills and am acutely aware of it. Since Sun is developing energy efficient servers they should position it as such. Namely they are cheaper to run, tree hugging can be done by them and customers at their own expense. I was only advocating the positioning of the product, it is obvious the tree huggers are in control leaving us investors to fend for ourselves. Note to self: never invest in a company that doesn’t want to make money for its invesors. Participation age, Green computing, CommunityOne, sponsoring an eco event with KGO should be after you make boat loads of money for us. Investors bankroll the company, tree huggers don’t.

  24. i am trying to help sun and came to buy a T1000 Config 2 on the last day of the sale and while your store is open 24/7 it doesn’t let me get it at the anniversary price. this is the internet Web 2.0 and it’s still the 7th of May so what’s up.
    why don’t you contact me and get the credit card info and sell me the server as advertised?
    i’m a big fan of Solaris and Sun gear, but now terribly disappointed after getting authorization to get cool threads that you shut down the store and i was here 5 hours before midnight😦

  25. Nagakiran

    I believe that Sun still needs to be on-track for Making money,
    but nothing stops me from believing Sun is attacking the problems,
    steadily.
    Anantha,
    Hey man, pay million dollars in electricity bills and you will know where
    both the “eco”s meet, In the process of making money if you screw up the
    planet, you will be famous among your next gen investors aswell.
    Eco means efficiency aswell, why one should care ?
    Because it is need of the hour.

  26. I try to remove the double quote at the end of the link for javaOne but it doesn’t work for me.

  27. Well, the “Anniversary Sale” sure made some people here in Germany very happy — not. We pay Euro == US$ prices, thus giving you an extra margin, and are explicitly excluded whenever there is a marketing goodie. Sigh.

    Anyway, Sun hardware is good enough that it sells without eternal promos and discounts and seasonal sales… most of the time.🙂

  28. Kemp Watson

    Volker:
    I agree, and I’m next door in Canada. I was very appreciative of Jonathan’s admission that the sale was screwed up – not just from a channel perspective, though, but for many users, too. Sun is ‘thinking regional’, and has not executed on joining the global community, at least from a sales standpoint. It’s unpleasant to not only see others getting preferential pricing, but essentially have it shoved in your face through regional exclusion. Same goes for the Startup Essentials program, BTW. OTOH, the Try’n’Buy program _is_ here, and it’s a fantastic step for Sun.

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