McNealy: Innovation Matters, but So Does Profitability

The founder and chief executive of Sun Microsystems says that he will remain committed to a "controversial strategy" in the computing industry that says, good research and development can embody in hardware what other companies deliver with ar

BROOMFIELD, Colo.—Innovation matters, Scott McNealy says. The founder and CEO of Sun Microsystems Inc. says that he will remain committed to a "controversial strategy" in the computing industry: Good research and development can embody in hardware what other companies deliver with armadas of high-priced consultants, and it will provide answers to "large-scale computing problems" that other suppliers of hardware cant match.

"In a world increasingly turning to standardized microprocessors and computers based on them," McNealy said, "we believe Intel doesnt have a lock on all the good silicon ideas, so were going to innovate there."

Santa Clara, Calif-based Sun, for instance, has been delivering processors that chew data in 64-bit chunks for almost eight years now. Intel Corp. is still attempting to gain acceptance for its Itanium processor, with similar chewing capacity, and Advanced Micro Devices Inc. is just beginning to introduce its Opteron alternative.

In its 2002 fiscal year, Sun spent $1.8 billion on research and development. That was 14.7 percent of its $12.5 billion in revenue for the year. By contrast, Dell Inc., which assembles machines based on Intel processors, spent $455 million on research and development. That was 1.2 percent of its $35.4 billion of revenue. The heavy spending on research helped push Sun into the red. The company recorded a net loss of $587 million. Dell produced a net profit of $2.1 billion.

McNealy acknowledged that returning his company, whose stock closed the week at $3.92 a share, to consistent profitability is critical. He acknowledged Saturday that growing revenue and cutting costs are his top priorities.

He said he expects to be able to save "hundreds of millions" of dollars in annual expenses by encouraging Sun employees to work at home, driving down facilities costs; reducing the expense of maintaining and upgrading customers systems, through remote diagnostics and "proactive" replacement of components; and such moves as turning over training facilities and specific training tasks to Accenture, the large technology consulting firm.

McNealy made his comments here, in the town that is home to Suns corporate-services business. He said Sun is able to integrate hardware and software in its own facilities, crash-test it and deliver it ready to go. He discounts Dells ability to match that.

"Michael Dell is Autozone," he said. "Michael just ships you car parts; he doesnt ship you a system."

When analyzing the purchase of a system from the Round Rock, Texas, manufacturer, "you need to go down [Dells] price list and give it to a corporation and theres a staggering amount of work that you have to do. Put it in a rack, raise the floor, do the air conditioning, all rest of it, then bring in the storage, bring the network inside the firewalls, youve got to piece it all together," he said. "We build the whole thing in our customer-ready systems."

In the fourth quarter of its 2003 fiscal year, Sun said in late July that it earned $12 million. But for the full year, the company said it suffered a net loss of $2.4 billion on revenue of $11.4 billion. Nonetheless, the cash generated by its operations exceeded the cash it used, for the 35th consecutive quarter. The company ended the year with more than $5.7 billion in cash and marketable securities.

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