Solaris and Dell... and Virtualization, Of Course

It was an exciting morning... we made two big announcements at Oracle Open World.

First, we announced a key relationship with Dell, through which they'll be OEM'ing Solaris, and directly supporting customers running Solaris on Dell systems. Second, we announced our free/open source virtualization roadmap, starting with xVM and xVM OpsCenter, our hypervisor and management product set.

With the Dell relationship, Michael joined me on stage (after I assured him there would be no uninvited hugs), and kindly offered me a Dell t-shirt (I gladly accepted). You can watch the whole keynote here.

Truth be told, the relationship with Dell has been in the making for a while - I flew down to Texas last year to have dinner at his house (with a fortuitous 180 knot tail wind - sadly, I had return the same night with a 180 knot headwind). If you're thinking, "hm, didn't Sun's relationship with Intel start with dinner, too?" you're picking up on a theme - great partnerships start with a meal, in my book. At that dinner, we began discussing ways we could work together. Since then, we've both heard from a ton of customers that they're running Solaris (and Sun Software, broadly) on Dell systems - and they'd like us to work together to make the experience a seamless one. It's important to note, of the Solaris instances distributed into the world, roughly a third run on Dell - that's certainly motiviation for us both to work together.

Dell and Sun will work shoulder to shoulder to support joint customers. And we expect our respective sales organizations to do the same - in pursuit of the highest quality customer experience possible. We'll be making joint investments to build new solutions for customers, working to expand the already large Solaris ISV community for Dell systems, and broadly work together to build new business. For customers, partners, Sun and Dell - win/win/win/win.

Dell's now advantaged in the marketplace, as well, and alongside Intel and IBM, can better serve customers wanting a single hand to shake (throat to choke isn't the experience either of us are seeking). Reciprocally, Solaris is clearly advantaged by association with Dell, the company that invented volume success in the IT marketplace. The relationship broadens the market for the both of us.

So why are we signing these partnerships, rather than simply locking Solaris to our own hardware? (Yes, I still get that question...) Because locking Solaris to Sun would be like a wireless carrier selling you a phone that didn't roam - or an automobile manufacturer mandating you buy their gas after you've bought their car. There's probably a market for both, it's just smaller than the market we're after - the global market. In which customers value choice.

So thanks, Michael, and the whole Dell team. We're looking forward to building the market.

We also introduced our new virtualization offering today, the Sun xVM hypervisor, and Sun xVM OpsCenter management suite (the video, above, has a great presentation/demo by Rich Green, who runs our Software biz). I'll be putting together some thoughts later on our approach to the virtualization market, but in short, for geeks... our xVM hypervisor is a very lightweight kernel that inherits proven virtualization technologies (like ZFS, FMA, Dtrace and Crossbow) from the Solaris kernel - while supporting Linux, Windows and Solaris as guests - imbuing guest OS's with the properties of the host hypervisor.

We also announced a variety of partners today, most importantly Red Hat, who'll offer reciprocity with their hypervisor, like Microsoft. As our mothers told us, it's important for us to be a good guest, and a good host. We plan on doing both.

As with all our innovation, xVM is going to start first in the community, where we can engage the folks who'll help make this a success - if you have an interest in joining the developer/administrator community we'll build around openxVM and the OpsCenter management platform, come visit us at OpenxVM.org.

(and finally... for those interested in why our ticker symbol changed again... it didn't. After a reverse split, the exchanges append a character to the symbol for a period of a few weeks to let them adjust their systems.)

Posted on 08:20PM Nov 14, 2007 | Comments[57]

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Offering Color on our Q1 Performance

We announced our first quarter results on Monday after the close of the stock market. You can read the press release here. And as usual, I thought I'd offer some thoughts around our performance.

We've heard a number of questions, as we do every quarter - this quarter, those questions came down to basically three areas. What went well within the quarter? What didn't go so well? Why didn't you grow - augmented with why did the share price decline?

So, without a lot of fanfare, here are some thoughts.

What went well?

I was very pleased with the leverage in our operating model - that's just a polite way of saying we delivered our single biggest Q1 profit since 2001, and it's good to be back in the habit of making money. Even in what's traditionally our toughest quarter of the year, and even with a restructuring charge that took three cents off our GAAP earnings, we generated $89 million in net income.

We executed on our R&D, and delivered a seven year high in gross margin - up 5 percentage (yes, percentage) points year over year to 48.5%. Product gross margins were up 5.3% year over year, services gross margin was up 4.3%. Customers appear to value what we're building, and our teams are executing well.

While our overall revenues were up only 1% over the prior year, deferred product revenues were up 18% (or roughly $100m). Deferred product revenue represents products (hardware and software) we shipped, that either hadn't been installed or met customer acceptance criteria - we will recognize them in the near term, and it's generally good to have a growing backlog of deferred revenue. In addition, we took roughly $20m out of channel inventories as we make progress toward managing our business on a "sell out of the channel" basis, vs. "sell in to the channel." This shift makes us more transparent for investors (we recognize revenue on customer activity, not channel enthusiasm), and more effective in working with our partners.

Again, while overall revenues were 1% up Y/Y, our high end and mid range business was up 23% (year over year), our Niagara chip multi-threading systems were up a fantastic 70% -to a $750 million annual run rate - and our X64 business was up 10%, with blades generating around $40 million) and growing nicely, along with good momentum in our higher scale x64 platforms (as I've said before, virtualization depresses units in the short term, but increases configuration, ASP and margin). Our storage business stabilized, and grew faster than Sun overall, at 2.9%. Storage is getting a lot of focus, both at the software level (you probably saw we just introduced our CIFS implementation into the OpenSolaris community, which makes it an ideal NAS platform for Windows users), and at the hardware/system level, as well.

We delivered a big cash quarter, generating $574m, our biggest Q1 cash flow in... well, recent memory.

So net/net, we had lots to be pleased about - in addition to announcing new relationships in which IBM agreed to OEM Solaris, Microsoft agreed to support our virtualization efforts (and vice versa) and Google agreed to promote StarOffice, we also demonstrated our confidence in the business by buying back a massive $1.25 billion in JAVA shares. We put our money where are mouths are, for those wondering.

What didn't go well?

The top line revenue growth was marginal - at around 1%. Deferred revenue isn't counted, obviously, and we chose to take inventory out of the channel, knowing it would go against revenue within the quarter. That yielded a mixed bag on the top line, even with help from currency shifts.

Although our EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific) businesses grew (some geographies, like India and China, in big double digits), our US business was down roughly 4% year over year (and at 40% of our revenues, if the US catches a cold, Sun catches a cold). Why was the US slow? We don't have a crystal ball. Was it related to the US mortgage crisis? I can't imagine it helped. Some financial customers grew, others shrank. Partners seem more excited than in a long while. So there's no easy analysis.

Our volume systems business grew only 3%, so our total computer systems business grew only .5%. Our new products haven't eclipsed our legacy businesses - even though the former are on good ramps. Our support services business was down just under 1%. And we had demand for several non-shipping or new products, notably our newest quad core x86 servers and eight core Niagara 2 systems (both now shipping), but some customers may have waited for Q2. Again, very hard to tell at a global level. On an anecdotal basis, customer sentiment is way up on Sun. But sentiment and purchase orders are authored with different pens.

But push comes to shove, the only thing I was disappointed in was our top line growth - nearly every other metric is now moving in the direction we want. Financial measures, like margins, cash, predictability, quality, competitiveness of the product line - all the right foundational elements. And longer term measures - adoption around OpenSolaris, support for Java on devices and among the developer community, analyst ratings.

So fine, why didn't you grow? Why'd the share price decline?

As I said, we don't have a perfect answer, other than to say - we don't see competitive issues holding us back, the team is executing well, and the brand and reputation of the company are now amplifying opportunity, not depressing it. The single biggest issue was some customers slowing down some purchases in the US, but it wasn't specific to financial services (although companies in the midst of CEO transitions tend to put a lot of things on pause), or even more general to all customers (several industry sectors grew, like our government business).

Why'd the share price decline? This is obviously a question lots of folks asked (especially after today's market decline) - and the only answer I can give definitively, and without meaning to be cavalier, is that there were more sellers in the market than buyers. The opposite of what makes our share price rise.

And just in case we failed to make it clear, of course revenue growth remains our highest priority. We're focused on taking a refreshed product and service lineup, into markets we expect to grow across the earth - and investing to deliver value to customers and shareholders. In my view, we took another step forward in Q1.

Posted on 05:58PM Nov 08, 2007 | Comments[42]

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Congratulations Google, Red Hat and the Java Community!

I just wanted to add my voice to the chorus of others from Sun in offering my heartfelt congratulations to Google on the announcement of their new Java/Linux phone platform, Android. Congratulations!

I'd also like Sun to be the first platform software company to commit to a complete developer environment around the platform, as we throw Sun's NetBeans developer platform for mobile devices behind the effort. We've obviously done a ton of work to support developers on all Java based platforms, and were pleased to add Google's Android to the list.

The Java platform has come a long way - we're on the vast majority of mobile devices in the marketplace today (well over a billion phones at last count), and with Google's mobile services (like gMail and Google Maps), along with Yahoo!'s Go Mobile, alongside a massive spectrum of incredible entertainment offerings from folks like Electronic Arts, we have by far and away the most complete content ecosystem on the market today. Enabling carriers, handset manufacturers, content creators - and most of all, consumers - to get the most from their mobile devices.

And needless to say, Google and the Open Handset Alliance just strapped another set of rockets to the community's momentum - and to the vision defining opportunity across our (and other) planets.

Today is an incredible day for the open source community, and a massive endorsement of two of the industry's most prolific free software communities, Java and Linux.

Stay tuned for specific details - for those so inclined, download NetBeans here to check out the industry's most popular IDE for mobile Java development.

And in the spirit of offering congratulations, I'd like to offer a similar shout out to our friends at Red Hat Linux - who today announced their support for the OpenJDK project. With friends like Google and Red Hat, it sure seems like the momentum behind Java's on the rise...

Posted on 01:27PM Nov 05, 2007 | Comments[76]

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