Final Exams & Q2 Earnings

This week, both my children are having final exams in school. Just like the report cards that will follow next month, Sun published our own report card yesterday in the form of our quarterly earnings report. By now, many of you have probably seen our Q2 earnings report which is available online at http://www.sun.com/investors. Just like my kid's report cards will show grades for each subject, Sun is very transparent in reporting our earnings, with our earnings presentation breaking it down by product category (page 6) and by geography (page 14). The information content in the presentation is much richer than the many press headlines which seem to be more impacted by hourly stock swings than detailed results.

Being responsible for a large portion of Sun's server sales, I naturally gravitate to the page 6 Billings Disclosure By Category chart where nine quarters of billings for Solaris SPARC Enterprise Servers, Solaris SPARC CMT Servers, and x64 Servers are detailed. Lets start with our x64 servers, which customers use to run applications on Solaris, Linux, and Windows. Q209 our x64 server billings grew 11% year over year. In fact, if you read the footnote, X64 Servers includes X64 Rack, X64 Blades and X64 Netra products and excludes products categorized under Open Storage and note that Open Storage, which includes products like our x4540 storage server, grew at 21%, the growth was even higher. Not bad when some of our competitors saw greater than 30% decline last quarter in their x64 servers. So why are Sun x64 sales growing when others using the same Intel and AMD CPUs declining? In fact, in Q2, we saw the second highest growth of any quarter going back to Q4FY07.

I attribute part of our x64 server growth to the continued adoption of Solaris, especially OpenSolaris. Sure, you can buy an x64 server from Dell or IBM with Solaris, or you can download OpenSolaris and run it with confidence on one of the 3897 types of x86/x64 systems on the OpenSolaris Hardware Compatibility List. Did you even realize there are 3897 different kinds of x86/x64 systems?

Of course a lot of our x64 customers also run Windows like I discussed a few days ago as well as Linux. But Sun's differentiation goes beyond just software. More and more, customers want to purchase complete solutions that speed time to productivity with integrated networking and storage functionality. That is exactly what our x64 based Sun Compute Cluster offers for demanding HPC environments such as structural analysis or financial services. Believe it or not, some financial institutions want to do more analysis before trading that basket of mortgage backed securities these days.

At the other end of the compute spectrum, our SPARC Enterprise Server billings, while seeing a y/y decline in sales, did grow q/q by $86M. If we were a startup with a product line totaling $86M in sales we probably would be thinking about going public (yes, even in this market!). As Jonathan mentioned in answering an analyst's question during the earnings call, the enterprise server market is somewhat lumpy, but it is hard to ignore an $86M increase in these economic times, especially on large enterprise servers which are one of the IT products seeing the most increased scrutiny and an easy target of budget delays. So why the growth? For starters, no other vendor can offer the same open source Solaris operating system running on sub $1000 x64 servers to $1,000,000+ enterprise servers. But even our largest 256 core M9000 servers costing over $1M, when used to migrate off a mainframe or virtualize hundreds of older servers can easily generate positive ROI in a short time frame.

Needless to say, like our shareholders this morning, I'm bullish on Sun. We are making a lot of tough moves to adjust to the fiscal realities of today's difficult market, while at the same time continuing to fund our key technology investments that will continue to bring you great systems products for many years to come. So just like my kids will start a new school quarter next week, I'm focused on our new quarter, and excited about it!

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