Analyst Conference Summary

Sun Microsystems

conference date: January 23, 2007
for quarter ending: December 31, 2006 (2nd fiscal quarter 2007)

Forward-looking statements

Overview: Marginal profitability is better than losses: earned 3 cents per share. Not bad for Sun.

Basic data:

Revenues of $3.566 billion up 7% from year-earlier quarter.

GAAP net income was $126 million, resulting in earnings per share of $0.03. That was up from a net loss of $223 or $0.07 per share the year-earlier quarter.

Cash and equivalents ended at $4.837 billion. Positive cash flow from operations $153 million.


Seasonally challenging March quarter.

Revenues seasonal sequential decline of 3-5%. Gross margin of 42 to 44%.

Operating expense about $1.45 to $1.5 billion.

In second half of fiscal 2007 (March and June quarters):

$70 million amortization of intangibles per quarter. $60 million stock-based compensation charges. $40-50 million net interest income per quarter. $150 to $200 million tax provision for full fiscal year.

GAAP 4% operating margin by Q4. Long term are committed to 10% margin.

Conference Highlights:

GAAP net income included $58 million of stock-based compensation expense, $26 million restructuring and impairment charges, and a tax benefit of $4 million, netting ($0.02) per share.

Announced an investment in convertible debenture notes by KKR Private Equity Investors. Will use to pursue strategic opportunities for growth.

Does not expect to deliver new Intel systems in volume until mid-2007.

Server computer systems grew faster than market. 18% Sparc server annual revenue growth. Niagara over $125 million in sales. Ultrasparc grew 16% with particular strength in high end. Sunfire grew 46%. Solaris on Intel should create more growth. 16 core tapeout done, so Niagara 2 on schedule.

Storage did well with high-performance computing and financial services. But down slightly on year-to-year. Thumper began shipping in December with revenues around $20 million.

Services up 6% year over year. Professional and Education services up 11%.

Software saw 2006 shift to GPL. Sentiment good for Java, now used by Yahoo and Google. Revenue to be recognized over time through licenses. Large mobile opportunity as well.

Intel Solaris: default Unix for Xeon. Available in free editions. Now a leader for network infrastructure. The OEM agreement allows for its installation on all Xeon systems. Should be available not only AMD and with Intel servers supplied by HP, Dell and IBM. Sun is a serious contender in x64 space, with good margin opportunities.

Currency had more impact than usual mainly with India service contracts in local currencies. Impact positive about 1 cent per share and helped with gross margin.

India grew 9% year-over-year, Asia Pacific 20%. US declined 4%.

Lowering inventory in channel partners.

Ending backlog of $1.021 billion was flat year-over-year but up 3% sequentially. Deferred revenues grew 9% year-over-year.

Gross margin exceeded expectations due to efficiency and currency bump and product mix. Products gross margin up 3.1% sequentially.

Operating expenses in line with expectations. 34,600 employees.

Expect to generate cash in fiscal Q3 and Q4.

Achieved goal of operating income of at least 4%.


KKR transaction: You are cash flow positive and have lots of cash, so why? Helps raise awareness in financial services community. Has skills and connections Sun needs. Mildly positive impact due to structuring. [Analysts expressed puzzlement]. Sun currently actually has only a small percentage of financial market.

Unit growth v. mix? Strength across line. Volume precedes value.

How can you get to 10% operating margin? Intend to deliver at least 4% operating margin in Q4, has made progress towards that.

Gross margin? Currency had a benefit. Typically a volume impact in fiscal Q3. Mix was more towards towards midrange and high-end.

Intel transaction? Augmenting existing, rapidly growing product line with Intel. Margins are going up. Differentiation of marketing AMD v. Intel is up to them. Isn't about replacing AMD processors or price, but about Sun winning Intel share from HP and Dell.

Storage system business integration? Did have some difficulties, should be smoother going forward.

Server mix, what has fueled that? Seen accelerating growth in systems business due to AMD, Solaris. Gaining share. Would like to see stronger unit volumes at low ends as that creates opportunities. Would not say why skew towards mid and high range sales.

Share buy backs? More interested in growing the company.

Software sales? Up 2% year-over-year. But also had increased deferred revenue.

Solaris v. Linux or other? Growth in market share creates opportunities to sell systems.

Workforce? Down by 1600 in quarter. Will continue reductions to take out redundancies, not that focused on a numerical target. Down 3700 over last year.

AMD v. Intel and component margins? Not moving from one to the other. Expanding to go after total market. Component cost reductions happen, including when vendors compete.

Storage? Hopefully won't have the usual seasonal impact in March quarter.

Backlog down with book to bill up? Backlog is down a few percent sequentially.

Niagara stuck around $126 million? Conversion to evaluations to deployments is high. Getting as many new customers as existing customers. Niagara 2 has outstanding metrics, and no one else will be able to touch our hexacore platforms.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers