"Shame on us, with 42 or 43 percent gross margins...our intellectual property, our installed base, if we can't leverage that into some growth, into making money," McNealy said at Sun's annual meeting with financial and industry analysts, held this year in San Francisco. At Sun in the future, he said, "there will be much greater emphasis on "make money and grow.'"
And retiring Chief Financial Officer Steve McGowan steered analysts toward a Barron's article that argued Sun's stock price should increase once the company's business starts to stabilise. "It is our view and belief that it has stabilised," McGowan said.
But Sun, whose stock price has been largely flat for years, faced sceptics in the audience. "This is the fourth straight year where your priority is to make money. It's the third where your priority is to grow," said Sanford C. Bernstein analyst Toni Sacconaghi. "You haven't fulfilled those priorities."
Sun is banking on a major overhaul to its core server products -- including the UltraSparc T1 "Niagara"-based servers and "Galaxy" line of x86 servers, both introduced late in 2005, as well as the systems based on the UltraSparc IV+ processor that were in higher demand last quarter than Sun expected. At the same time, it's giving all its software away for free and making most of it open-source to attract developers and customers.
Sun stopped a revenue slide but has yet achieve consistent profitability. Revenue growth of 17 percent to US$3.3 billion in Sun's most recent quarter stemmed from acquisitions of software maker SeeBeyond and storage specialist Storage Technologies.
McNealy and President Jonathan Schwartz encouraged analysts to scrutinise several "leading indicators" such as licenses for Sun's now-free Solaris operating system, which the company believes portends later revenue.
"We shipped more licenses of Solaris in the past 12 months than we have in the combined history of the company," Schwartz said, probably 100 or 1,000 times more than the rival Unix products from IBM or Hewlett-Packard. That, in turn, attracts developers, software companies and ultimately customers, Sun argued.
Another indicator is sales of the Java Enterprise System subscriptions. Sun sells support for the free software on the basis of how many employees a company has; the entire suite costs US$140 per employee per year and subsets cost US$50 per employee per year. In the fourth quarter of 2006, JES subscriptions rose to 1.1 million.
"Two years ago...there was an enormous amount of scepticism in this room" about the JES project, then code-named Orion, McNealy said. "If we'd told you we'd sign up General Motors, General Electric, American Express, the UK national health service, Blue Cross Blue Shield Massachusetts, FedEx, and (show) this kind of a growth rate, you'd have laughed us off the stage."
Bullish McGowan
In Sun's most recent quarter, expenses jumped 36 percent to US$1.6 billion, in large measure because of the StorageTek and SeeBeyond acquisitions. But people shouldn't worry that the increased expense signals an end to Sun's cost-cutting days, McGowan said.
Sun can save US$100 million by reducing the cost of goods sold by taking measures such as moving StorageTek product manufacturing to external partners and having those products shipped directly to customers, he said. Another US$100 million will come from operating-expense "synergies" with the acquired companies, he added.
Sun also has closed numerous offices in recent years, cutting real estate from 16 million square feet in fiscal 2002 to 10,000 in fiscal 2005. That trend, too, will continue: Sun plans to cut 160 offices that were made redundant by the StorageTek acquisition. And Sun just announced it's closing most of its Sunnyvale, California, campus.
Sun spent a large fraction of its cash on the StorageTek and SeeBeyond acquisitions, but the company doesn't expect to dip further into its remaining assets of US$4.3 billion. "Our plan now is to start growing the cash now from that base," McGowan said.
Detente with Oracle
McNealy said Oracle CEO Larry Ellison recently gave Sun a big shot in the arm by lowering the licence fee that the database company charges for Sun servers.
"I sat down with Larry and said, 'Larry, you're killing us,'" McNealy said. "Part of the problem is we didn't have the fastest microprocessors, so you had to throw a lot of microprocessors at it. When you charge US$30,000 per core, we ended up looking very expensive."
"He said, 'You know, you're right.' I almost fell off my chair," McNealy said. "It's turned around 180 degrees for us. This is a big, big win. Larry Ellison basically lowered the cost of goods sold in one fell swoop."
Sun's Oracle problem got worse with UltraSparc T1, which has eight processing cores. "We had a US$3,000 server, but it would have cost US$240,000 for the Oracle licenses," McNealy said. Now Oracle only charges one quarter the licence fee for T1 cores. "It only costs $60,000 for a $3,000 server. That's progress!"
McNealy said Sun's embrace of two open-source databases, PostgreSQL and Derby, aided his cause. "I think there was some incentive and motivation to do the right thing,' he said.
