News

posted on 02 May 2008 07:09

Sun's Q3 fy08 results greatly surprised analysts as the company recorded its first net loss in five quarters.

It earned $3.266 billion in the quarter, a marginal 0.5 percent down on the year-ago quarter's $3.283 billion.This $16.415 million shortfall together with a tax provision and MySQL acquisition costs sent the company into a net loss for the quarter of $34 million ($0.04/share) compared to the Q3 fy07 net income of $67 milllion ($0.07/share).

CEO Jonathan Schwartz blamed sales in the USA, saying: "The U.S. economy presented Sun with significant challenges in the third quarter, masking our progress in developing nations and economies across the world. With double digit year-over-year growth in India and Brazil, and triple digit billings year-over-year growth in our ... Solaris-based chip ... systems, Sun made considerable progress during the quarter. We continue to invest in the future created by open alternatives to proprietary technologies, best exemplified by the acquisition of MySQL. The world is moving to open source innovation, and Sun continues to lead that revolution."

That may be but recessionary chill in the USA has lowered Sun's revenue-earning temperature. Computer systems products recorded revenues of $1.473 billion, down 1.8 percent on the year-ago quarter. Storage products earned $530 million, down 5.4 percent on the Q3 fy07 figure and down 19.1 percent on the immediately preceding Q2 fy08. Sun expected to earn about $100 million more storage revenue in the quarter. High-end stuff like tape libraries showed lower sales though.

Sun tried to wring more profit from its essentially flat revenues; its gross margin rose to 44.9 percent, up 0.4% from the year-ago quarter. Good sales overseas, sparkling in some geographies, could not compensate for the weaknesses in the USA, indicating how delicately Sun is poised between profit and loss.

Sun is going to cut operating costs again, with up to 2,500 workers poised to receive pink slips according to CFO Mike Lehman.

The company says it has a relentless focus on profitability. But it is clear, many would say, that that focus is constrained by its long-term strategy which is to earn revenues from a vast population of open source software users who are not locked in to Sun's hardware in any way. It is gradually and steadily stripping out license value from its software offerings by making them open source and only earning support service revenues from such transformed software, a fraction of the license revenues foregone.

The sales of its hardware are not rising fast enough to take up the slack, particularly as it is selling more and more x86 servers into a commodity-style market. Other companies might, if relentlessly focussed on profit, move their business attention to promoting high margin product and service sales and move away from low margin business. Sun, under Schwartz' leadership, is not doing that.

The prospect is that, if Schwartz and Sun are right and profit growth for Sun can come from being a successful seller of hardware, niche proprietary software, and services into the open source market, then it will take several years. This is a revolution, if it is a revolution, that is recording huge growth in the numbers of people downloading and using Sun's open source software but not huge growth, or much growth at all, none this quarter anyway, in Sun's earnings and income from the market.

The probability is that the huge growth in numbers of people using its open source software is not enough for Sun. It needs to double or triple that growth to get the business it needs. If it can't do that then sustained profitability could be two or three years away because the long tail of open source people it is selling to take too long to buy Sun product, don't buy enough of it, and there aren't enough of them yet anyway.

^{[Paul Roberts, news editor.]}