These are my spoken notes from last week’s earnings call – rather than recraft them, I figured I’d simply republish.
And thank you all for joining us this afternoon.
I’ll start with some perspective on our Q2 results and the current climate, then follow-up with commentary on our products disclosure – slides 6 and 7 in the slide deck. Then I’ll turn it over to Mike Lehman (Sun’s CFO) for commentary on financial metrics, and an update on the restructuring plan we announced back in November.
Overall, results for Q2 were in line with what we expected, as macro worries factored into customer discussions across all geographies. These concerns resulted in decisions related to higher end system purchases being pushed out – so billings were down year over year for SPARC Enterprise Servers, alongside the Storage and Service businesses attached to them, continuing a trend that began about a year ago. With that said, growth in our key areas continued, with Software a high point, and our Open Storage, CMT or “Niagara,” and x86 systems businesses all delivering double-digit growth.
As we shared with you last quarter, Sun’s business can be viewed in two categories, “Traditional” and “Growth,” depicted on slide 7. Growth Categories now account for over 1/3rd of Sun’s products billings, up from just 23% one year ago, and are continuing to open new opportunities within our existing installed base, and more importantly, far beyond it.
On the traditional front, declines in Enterprise SPARC systems are, by and large, the result of purchase delays – and with mission critical systems platforms continuing to age, this business represents significant future upgrade and refresh opportunities. But we were disappointed with the results, and the related effect it had on our storage and attached service offerings. Our tape and archive business out performed the competition, albeit in a declining market, but also represents an attractive base of annuity opportunities going forward.
On to the growth businesses.
Software was a shining light in Q2 as total software billings grew 21% year over year and 52% sequentially. Java software billings grew 47% year over year, as we continued to monetize our distribution power to the world’s client devices, from personal computers, to set top boxes and mobile handsets, and as we began delivery of our new platform, JavaFX, to OEMS across the world. As mobile devices and network enabled consumer devices continue to heat up, we believe the Java platform, running in front of billions of consumers, represents an increasingly attractive business.
MySQL and Infrastructure software billings grew 55% year over year on a surge in demand for open source middleware, from identity management and database management, to integration software. In the midst of this economic downturn, discussions related to free and open source software have substantially heated up – this is no longer a peripheral discussion with CIO’s – cost reduction related to open source adoption has become a focal point for decision makers across the world.
Solaris, Management and Virtualization billings grew sequentially but not year over year, as customers migrated to subscriptions and service offerings and away from traditional licensing. We believe this transition has been largely completed in Q2, and again, positions the Solaris and OpenSolaris platform as one of three surviving operating systems for cloud computing – alongside Microsoft’s Windows and Linux. As a result of our assets, from Java and OpenSolaris to MySQL and xVM, Sun is positioned to be the provider of the world’s most complete open source software platform – for enterprise computing, and more importantly, for the cloud.
Now, on to the Systems side of our business.
Billings for our Solaris-based Chip Multi Threading systems (also known as CMT or Niagara platforms) increased over 30% year over year in Q2. Based on Q1 and Q2 FY09 billings, CMT systems have now become a $1.4 billion dollar plus annual business for Sun, growing at significant double digits – and with IBM’s Power and HP’s Itanium available in only high end configurations, our Niagara platforms stand alone as volume alternatives to customers running IBM’s AIX and HP’s HPUX. We continue to broaden our Niagara offerings, most recently with the addition of the T5440, a powerful midrange computer fueled by the growing base of volume Niagara units, in both blade and rack form, complementing our x86 platform offerings.
Speaking of which, Sun’s family of Intel and AMD-based X64 servers increased 11% year over year in Q2 billings. Blades, which include SPARC, Intel and AMD processor-based systems, delivered another outstanding quarter, growing billings 62% year over year. We believe this performance reflects market share gains across both industry-standard and blade servers, building a footprint that allows for higher margin software, service and storage offerings.
To that end, billings for Open Storage Products grew 21% year over year, which reflected, in part, a transition to Sun’s flash-based 7000 family, also known as “Amber Road,” around which we’re seeing tremendous customer and partner interest. Based on industry standard components and the popular open source ZFS file system, these platforms deliver massive price/performance benefits against proprietary NAS vendors. With more than 2,000 channel partners now trained and certified to sell Amber Road, and with customer buzz among the highest we’ve ever seen for a new storage product, we have high expectations going forward. This is the first of what will be a complete line of open storage based products, covering the smallest customers, all the way up to mainframe storage.
Amber Road also sets us up to broaden our line of appliances – just as the freely distributed ZFS file system creates opportunity and awareness for Sun’s open storage offerings, I believe our newly introduced Crossbow platform creates similar opportunities for Sun in the networking marketplace. Like the market for traditional storage, the networking marketplace is characterized by very high prices, proprietary software and restrictive hardware platforms – exactly the environment in which open source software and commodity components create choice and competition, welcome changes for customers seeking budgetary and technical relief.
To conclude, I’ll remind you that tough times create unique opportunity for those who innovate – although we see customers under stress across the world, that pressure is opening their eyes to the alternatives Sun provides, across a wide range of ubiquitous software and systems innovations. Sun can draw upon the most pervasive software brands and developer platforms, the broadest user communities, and among the most powerful products and distribution assets to drive more aggressive growth in the future.