The news from Sun Microsystems’ quarterly financial report was not reassuring.
After talking about restructuring the company for more than a year to better compete in the marketplace, Sun CEO Jonathan Schwartz announced a $34 million net loss or 4 cents per share in the fiscal third quarter, compared with a net income of $67 million or 7 cents per share profit in 2007.
Those results could lead to Sun cutting up to 2,500 positions as it looks to refocus its energies.
One source of this sudden downturn in the company’s fortunes seems to be the company’s high-end systems business. When the results came rushing in May 1, several analysts noted that the company seemed to have lost ground in one of its most well-known product areas, specifically its high-end Unix server business with its line of systems based on SPARC processors.
In an analysis by Josh Farina of Technology Business Research, Sun shipped 4.6 percent fewer SPARC-based systems in the quarter compared to the same time last year, which made it the sixth straight quarterly decline for the company’s high-end systems. At the same time, the company’s shipments of x64 servers, machines based on processors from Advanced Micro Devices and Intel, increased by 26 percent.
Overall, Sun’s server revenue dipped 1.8 percent in the quarter to $1.47 billion.
While Schwartz and Sun executives blamed the slowing economy in the United States for the company’s current financial woes-about 35 percent of its sales are in the United States-Farina noted in his analysis that IBM turned a profit during the same time period.
“Overall, Sun reports that the uncertain U.S. economy led the company to post a year-to-year revenue decline in [the first quarter of 2008],” Farina wrote in an e-mail. “However, I’m hesitant to believe that the U.S. economy was the key factor, since IBM, which earns around the same percent of revenue from the U.S., at approximately 30 percent, posted 11.2 percent growth in [the first quarter 2008] and 6 percent growth in the U.S. Sun appears to be losing to its competition.”
New Unix, Linux Challengers
At the high end of the Unix market, a few players such as IBM, Hewlett-Packard and Sun are competing for an increasingly shrinking market, although it remains a market with high margins and good profits. In its most recent report of the server market, IDC found that Unix revenue grew at only 1.5 percent in the fourth quarter of 2007 for a total of $5.2 billion.
With the market essentially flat, Joe Clabby, president of Clabby Analytics, said he believes that IBM has been able to grow by taking market share away from Sun’s SPARC systems as well as HP’s servers based on Itanium processors from Intel. One reason could be IBM’s Migration Factory program, which offers aggressive pricing and services to encourage switching from HP or Sun systems to IBM systems based on Power Architecture.
“IBM is gaining Unix market share in a flat Unix market,” Clabby wrote in an e-mail. “This means that they are taking it from someone and there’s only HP and Sun to take it from.”
Then there’s Linux.
For years, Unix systems supported the robust applications needed in financial services or government data centers, and it was an area in which Sun did especially well with its Solaris operating system and servers based on SPARC. Now, many application developers are recompiling their software to run on Linux, which gives customers the option of running applications on x86 hardware as well as on IBM Power systems, which offer Unix and Linux support.
“A lot of businesses look at these rows of Sun systems and ask themselves if they really need new SPARC boxes or do I go to x86-based servers for a fraction of the cost but with the performance I need,” said Charles King, principal analyst at Pund-IT Research. “The problem is that Sun came to x86 later in the game and the traditional Unix guys like IBM and HP are gunning for them in the high end.”
Sun has had some success with its new line of UltraSPARC T1 and T2 processors, code-named Niagara, but the delay of its new “Rock” processor and the fact that the company has not updated its older chips, such as the UltraSPARC IV+, to compete with IBM’s Power 6 chip have also hurt the company, King said.
In his analysis, TBR’s Farina calculated that about a third of Sun’s revenues come from the SPARC line. Farina also said he believes that Sun, unlike IBM and HP, has not done a good job of selling its high-end hardware to customers and the company cannot afford to lose a significant chuck of revenue from the high end.
“I think HP and IBM are better positioned to win on price than Sun is, in part because of their much larger revenue base, but also due to their more efficient operations,” Farina wrote. “They can afford to take lower margin on hardware deals in order to win business; then they likely make up the margin on software and services offerings.”