Financial

posted on 02 August 2008 05:56

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In the earnings call transcript, Sun CEO Jonathan Schwartz said: "On the storage front, we've moved our investments toward open storage, and are seeing early returns. Our first open storage product in what will be a far broader line in the upcoming year, ... known as Thumper or the Sun Fire x4500 grew billings 37% year-over-year in Q4 and again this was driven by the popularity of our open source ZFS file system, which is the foundation of our open storage product line across the board. You'll see us expand aggressively in open storage in FY '09."

In an answer to an analyst's question Schwartz said: "The one area of the product line we are probably most excited about the way we are hearing the most aggressive feedback from customers is everything around open storage and what open storage is doing is really bringing the value of open source software and innovation to the storage marketplace which has been historically proprietary and expensive. It's somewhat reminiscent of the server market back in the late 90s and the fact that ZFS is so popular it's just giving us a great opportunity to bring out innovations in flash memory, in Next-Generation Network attached storage so that’s probably their area we feel most confident in."

Thumper brought in a relatively small $120 million in billings in Sun's fy 08.

Uniquely Disappointing

Analyst Tony Sacconaghi of Sanford Bernstein asked: "Yes, thank you. You've disappointed versus Street expectations in each of the last two quarters and you're lowering expectations once again for fiscal year 09. I guess the question is I understand the environment and I understand that given the US focus, or the US concentration and enterprise focus and financial institutions that Sun might be a little bit more vulnerable. I guess the question is why has Sun uniquely disappointed consistently over the last six or seven months, relative to your expectations when not one single other vendor has?"

"Is there a product issue? Is there an execution issue? Have you been overzealous in your guidance, but you know your business. You know your concentration. You know your business models yet certainly over the last six or seven months you've been significantly overzealous relative to your actual performance. Can you provide a perspective on why that is?"

Sun CFO Mike Lehman replied: "... I think it's pretty unfair to say that we're the only company that has disappointed in the last six months, but we don't need to have that public debate and disparage anybody else. Certainly, we've been very transparent and very open in terms of what we are trying to go accomplish and we've made it very clear."

"As you pointed out that we have a number of large customers in the US. We have had a historical concentration. The number of those customers have been fairly publicly and negatively impacted and that has shown up in our results, and that's why one of the initiatives that Jonathan talked about is that we will be extremely focused this year on improving the number of customers we have, increasing the number we have, trying to improve our mix going forward from that perspective so we recognize we have a concentration and are doing everything we can to diversify."

Full year problems

Lehman said: "I would say that telecommunications was probably the area that was most impacted when we look at Q4 on a year-over-year basis, that that particular segment, especially in the US was fairly challenged and again we don't need to name names but just looking at the overall industry as you can, you can see that there has been some consternation in the US in the telco space and again historically telco and financial services and government have been pretty large for us and I'd say that all three of those were challenged even the US government in the second half of the year didn't meet our expectations, but those are the big three if you will."

Also in answer to a question about customer concentration: "So we're certainly diversifying the customer base that we have. We're being as aggressive as we can about it, but at the end of the day, when we see Henry Paulson bailing out yet another customer of ours in the front page of the Sunday paper we don't expect those businesses to recover or their IT budgets to recover any time soon."

Analyst Louis Miscioscia of Cowen and Company asked: "So in the US and Europe then, is it more of a sales execution issue because when you look at it if you go even back to the StorageTek acquisition and the other ones you've done and giving away free Solaris you've continuously talked about getting out to more customers but if your products are good then is it just sales isn't able to sell the products and match some of the industry growth rates?"

Lehman replied: "... when you've got $100 million customer that is not going to be growing its IT purchases but instead they're taking it down 80% that's a lot of new customer acquisition to make up that quickly. So we're definitely adding customers to our role and we're certainly accelerating those activities, now but we're not necessarily assuming that's going to be a large amount of revenue growth. The significant revenue growth is going to come from expanding the share of the customers we're selling into and continuing to grow in those economies and parts of the market where we think there's opportunity to do so."

No New Restructuring

Regarding any further restructuring Lehman said: "... we announced a range of restructuring at the end of Q3 in our Conference Call and in effect what we're doing is completing the notification process and the accrual process in Q1 so it's essentially the same restructuring. It's just a timing of that, the majority of the rest of the actions will be accrued in Q1, so it's the same restructuring not changed, not increased, just sort of finalizing it and getting to roughly to the levels that we had expected."

Sun is sticking to its open source, open storage knitting and hoping to ride out the current ecomnomic bad weather and emerge better placed than its rivals.

^{[Chris Mellor.]}