Free Virtualization, and Sun's Q2 Results

Please read the luculent Safe Harbor Statement at the bottom of this page....

We released our official earnings on Thursday last week, after pre-announcing the news one week prior alongside the announcement of our intent to acquire MySQL.

Our second quarter financial announcement came down to this: we doubled our profitability compared to a year ago, with $260 million in net income on revenues of $3.6 billion, while generating $336 million in cash from operations. We also repurchased $750 million of our own shares within the quarter, and reaffirmed our guidance for the full year of low to mid single digit revenue growth, and at least 8% operating profit for Q4 (excluding any acquisition charges).

From a financial perspective, with the glass half empty, total revenues were up only slightly (just over 1% vs. a year ago). This was partly due to changes in how we do business with our resellers and channel partners – we'll be reporting revenue when there's a sale to an end user customer, not when we've fulfilled an order from a business partner that sells to end users. (This makes us more transparent, too.)

Those changes took a few percentage points of revenue growth off the top line, and were one reason for the disparity between our bookings growth of 7%+ (bookings are orders for delivery within the next six months) and our revenue (orders fulfilled/installed within the quarter). With the glass half full, this generated a very healthy “book to bill” ratio, which investors look to for insight into future performance. Our total deferred revenues (products and services) also ballooned considerably, growing 24% year over year, to almost $2.7 billion. A very healthy increase.

What were some of the strategic highlights within the quarter?

Topping the list was the interest in Sun xVM. xVM is our free, open source virtualization platform, which we unveiled at Oracle Open World, alongside our management platform, xVM Ops Center. xVM will virtualize Windows, Linux or Solaris, on either Dell, HP, IBM or Sun hardware. We've seen broad interest from across the world, especially from customers that want to avoid putting a proprietary virtualization technology at the base of large scale open source datacenters (“why go back?” one said to me). Interest in our virtualization story (from xVM to Solaris containers) expands to every industry, and nearly every customer – it's just about the number one item on the agenda.

Next on the list was signing a Solaris OEM deal with Dell, through which they've endorsed and will support Solaris across their server and blade platforms. This was a very big deal for us – an endorsement from the volume leader in PC's and commodity infrastructure matters to our customers. Michael joined me on stage, and politely invited me to join Dell's “Regeneration” (an offer I gladly accepted in exchange for a t-shirt). Dell joins IBM and Intel as Solaris OEM partners. Personally, I'd love to add Hewlett Packard to the list of partners our customers can rely upon for Solaris support.

We saw double digit growth in emerging economies, from India, China, Latin America, to portions of Eastern Europe and the Middle East. We saw booming growth in our UltraSPARC T2 Niagara platform, generating approximately $285 million in billings, 100% higher than a year ago. 100% growth! Why's it growing so fast? A focus on eco-efficiency, on outright raw performance, integrated (ie., free) virtualization and crypto support - we see opportunity emerging every day. With the acceptance of SPARC and Solaris 10 as open platforms driving new conversations and opportunity (with our existing, and new customers - if you'd like to try a Niagara 2 (officially, a T5120 or T5220) system for free, click here).

Our x64 business was relatively flat within the quarter – which was a low point, certainly. But we're just now introducing our new Intel offerings, and starting to build out our blade offerings. So I've got more confidence heading into the back half of the year, and with a bulked up product line that continues to expand and evolve.

We also saw growth on the very highest end systems we jointly build with Fujitsu. We're seeing those systems perform at or above our internal benchmark estimates, and we couldn't be happier with the strategic progress Sun and Fujitsu are making as partners. Speaking of partner relationships, we saw good growth in our Hitachi high end storage offerings, alongside growth in our core tape business. As predicted, we're seeing growing interest in tape as an archive platform among web companies that must preserve very large pools of data (user generated photographs and movies, eg.) for long periods of time. Where “large pools” are tens of petabytes, growing to hundreds). Alongside growth in our enterprise business, we also saw good growth from our Services business.

What's my view on the economy? Having spent my undergraduate years studying the dismal science, I can say with complete confidence, “no one knows with certainty.” What do I hear from customers? That they're increasingly turning to technology to drive efficiency, automation, and growth. And we're a central figure in that conversation, far more central than a year ago.

In addition, we just held an event with 150 or so of our business partners from across the world – evenly split across Europe, the Americas and the Asia Pacific region. And what did I hear from those partners? That's confidential, of course, but there's a reason we're all holding champagne glasses. We're hoping to make a habit of toasting success.

To the partners that joined us at the event - thank you for the partnership. We are committed to growing our opportunity, and the value of our relationships. There's a world of opportunity in front of us, and we're looking forward to capturing it together.

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Safe Harbor Statement
Jonathan's blog contains forward-looking statements regarding the future results and performance of Sun including statements with respect to Sun's guidance for revenue growth for FY08 and operating profit for Q408, Sun's strategy and business opportunities and expectations regarding our x64 business. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors that could cause actual results to differ materially from those contained in such forward-looking statements include: risks associated with developing, designing, manufacturing and distributing new products; lack of success in technological advancements; pricing pressures; lack of customer acceptance of new products; the possibility of errors or defects in new products; competition; adverse business conditions; failure to retain key employees; the cancellation or delay of projects; our reliance on single-source suppliers; risks associated with our ability to purchase a sufficient amount of components to meet demand; inventory risks; and delays in product development or customer acceptance and implementation of new products and technologies. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2007 and its Quarterly Reports on Form 10-Q for the fiscal quarter ended September 30, 2007. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements. If you've read this far, you need more outside interests.

Posted on 11:18PM Jan 29, 2008 | Comments[32]

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In a Vortex

In a vortex. That's the only way to describe the past thirty days, during which we closed out our second quarter, and put together the transaction to acquire MySQL. How'd it all start?

"That'll never happen, I've been trying for years." That's what I told Rich Green (EVP, Software at Sun) about six months ago in response to his assertion, "if there were one company I'd love to acquire, it'd be MySQL. They're an amazing company." Why'd I say it was impossible?

For nearly five years, I've been getting together for dinner with Marten Mickos, MySQL's CEO, catching up on the industry, chatting about trends and business models, and just as the dessert was about to be served... I'd say, "geez, we have so much in common, Marten, we see the world so similarly, what would you think about becoming a part of Sun?"

At which point Marten would say he was flattered and honored, pour some milk into his coffee, stir, and start talking about Finland.

"I still think it's worth trying," said Rich. So we did - Marten, Rich and I set up another dinner for early December. At which we went through the same great conversation, updating one another on what we saw in the market and industry, how much we had common, and just as dessert was showing up, I popped the question. And...

...smile, stir, we're talking about Finland again.

So we leave the restaurant, talk about scheduling another dinner six months from now, and I look at Rich with the "See what I mean?" look on my face.

But unlike prior meetings, the next morning, Marten called me back and said, "We've been doing some thinking. Are you still interested in talking about an acquisition?" Um, yes. Yes. Just like the past four years.

And that's where it all started.

Tenacity pays, and Rich joins the growing list of people who can pull an "I told you so" card. (For the record, I'm happily proven wrong, it keeps me on my toes.)

Other than "how did this deal come to pass?" I've heard a lot of questions over the past few days, and thought I'd write down a few answers.

First things first.

A billion dollars for a company that gives its products away for free?

Facebook gives its products away for free, too. They make money on ads, we make money on service, support and infrastructure. MySQL has a big business, growing very rapidly. Investing in the future has more value than buying the past - which is why the latter so often comes at a discount.

What happens to your commitment to PostgreSQL?

It grows. The day before we announced the acquisition, and within an hour of signing the deal, I put a call into Josh Berkus, who leads our work with Postgres inside of Sun. I wanted to be as clear as I could: this transaction increases our investment in open source, and in open source databases. And increases our commitment to Postgres - and the database industry broadly. The same goes for our work with Apache Derby, and our JavaDB.

Josh says it exactly right on his blog - Sun wants to be the leading provider of datacenters. Not just MySQL datacenters. Exactly.

Who are you going to buy next?

Now that's a great question, we'll tell you after we're done :)

More seriously, I do agree with those that say Sun's acquisition of MySQL proves the value of open source business models - and I'm hoping it fuels yet more investment from the venture community in truly open source innovation. There is a ton of value to be had, just ask MySQL's investors.

What happens to your relationship with Oracle?

Oracle's a very important Solaris ISV - and we have joint customers across the world that have relied upon the service and support Sun and Oracle provide in mission critical environments to run the world's banks, retailers, telcos, governments, etc. Absolutely nothing changes about that commitment as a result of this deal - just as nothing changes in our willingness and ability to support DB2, or Microsoft's SQL Server (which also happens to run quite well on our systems, btw). Customers want choice, and we maintain our commitment to offer it.

It's important to remember, our service organization focuses on our customers, not our products.

Will the integration be complex like StorageTek?

StorageTek was 7,000 employees, with complicated supply chains, logistics processes, real estate, factories, redundant systems (like any big company), different engineering models and processes built up over a 35 year history. Integration was, to be blunt, complicated.

MySQL is 400 employees, without offices (their employees work from home), without a supply chain, no factories or real estate, and they have an engineering model and business process just about identical to ours.

So no, the integration won't be complex. It'll be quite straightforward.

After the transaction closes, Marten Mickos will continue to lead MySQL, will report into our Software organization, and will join my Executive Management Group (the top officers at Sun).

And strategically, there are technical synergies everywhere we look, as well - from MySQL on ZFS and Lustre, to better integration with Glassfish, OpenSolaris, NetBeans and our Grid Engine.

Will you change their platform priorities?

Absolutely not.

Why not?

Because the L in LAMP stands for Linux, not Looney. Customers prioritize MySQL's platform choices, not Sun. As with Glassfish, their number one download platform is still Windows - and we're very committed to those developers, as well.

Will you change MySQL's choice of license (the GPL)?

No. As you can see with Java, and with Glassfish (and NetBeans and OpenOffice), we're huge supporters of the GPL.

Are there cost synergies in the deal?

Nope.

Are there revenue synergies in the deal?

Everywhere we look.

Where are the revenue synergies?

The more interesting question is "where aren't the synergies?" Wherever MySQL is deployed, whether the user is paying for software support or not, a server will be purchased, along with a storage device, networking infrastructure - and over time, support services on high value open platforms. Last I checked, we have products in almost all those categories.

In addition, the single biggest impediment to MySQL's growth wasn't the feature set of their technology - which is perfectly married to planetary scale in the on-line/web world. The biggest impediment was that some traditional enterprises wanted a Fortune 500 vendor ("someone in a Gartner magic quadrant") to provide enterprise support. Good news, we can augment MySQL's great service team with an extraordinary set of service professionals across the planet - and provide global mission critical support to the biggest businesses on earth.

Where will you take MySQL next?

That's a question you'll need to vector to MySQL - both before the acquisition (given that we're still separate companies), as well as after. We're not acquiring them to tell them what to do - we acquiring them to listen. To their leaders, their community, and their customers.

And having listened to about 10 customers face to face over the past couple days, I've heard only one comment, made consistently - "Congratulations, this is absolutely fantastic news for all of us!"

I totally agree.

______________________________

Here's a quick interview Rich, Marten, Greg and I did on the Sunday before we signed (personally filmed by noted director Anil Gadre)... pay attention to the good luck charms that show up around the 3:30 marker...

(sorry for all the reposting...)

Posted on 08:52AM Jan 19, 2008 | Comments[47]

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Helping Dolphins Fly

We announced big news today - our preliminary results for our fiscal second quarter, and as importantly, that we're acquiring MySQL AB.

If you're interested in the financial details for the quarter, tune in to our conference call (see details on sun.com) today - we'll obviously have more to say as we release our formal results on January 24th.

But the biggest news of the day is... we're putting a billion dollars behind the M in LAMP. If you're an industry insider, you'll know what that means - we're acquiring MySQL AB, the company behind MySQL, the world's most popular open source database.

You'll recall I wrote about a customer event a few weeks ago, at which some of the world's most important web companies talked to us about their technology challenges. Simultaneously, we gathered together some of the largest IT shops and their CIO's, and spent the same two days (in adjoining rooms) listening to their views and directions.

Both sets of customers confirmed what we've known for years - that MySQL is by far the most popular platform on which modern developers are creating network services. From Facebook, Google and Sina.com to banks and telecommunications companies, architects looking for performance, productivity and innovation have turned to MySQL. In high schools and college campuses, at startups, at high performance computing labs and in the Global 2000. The adoption of MySQL across the globe is nothing short of breathtaking. They are the root stock from which an enormous portion of the web economy springs.

But as I pointed out, we heard some paradoxical things, too. CTO's at startups and web companies disallow the usage of products that aren't free and open source. They need and want access to source code to enable optimization and rapid problem resolution (although they're happy to pay for support if they see value). Alternatively, more traditional CIO's disallow the usage of products that aren't backed by commercial support relationships - they're more comfortable relying on vendors like Sun to manage global, mission critical infrastructure.

This puts products like MySQL in an interesting position. They're a part of every web company's infrastructure, to be sure. And though many of the more traditional companies use MySQL (from auto companies to financial institutions to banks and retailers), many have been waiting for a Fortune 500 vendor willing to step up, to provide mission critical global support.

So what are we announcing today? That in addition to acquiring MySQL, Sun will be unveiling new global support offerings into the MySQL marketplace. We'll be investing in both the community, and the marketplace - to accelerate the industry's phase change away from proprietary technology to the new world of open web platforms.

The good news is Sun is already committed to the business model at the heart of MySQL's success - first investing to grow communities of users and developers, and only then creating commercial services that attract (rather than lock in) paying customers. Over the past few years, we've distributed hundreds of millions of licenses and invested to build some of the free software world's largest communities. From Java to ZFS, Lustre to Glassfish, NetBeans to OpenOffice.org and OpenSolaris, we've been patient investors and contributors, both. Free and open software has become a way of life at Sun. MySQL's has similarly driven extraordinary adoption of their community platform, with more than 100 million downloads over the past 10 years. Their users, as with Sun's, run MySQL across every major operating system - Linux, Windows, Solaris and the Mac; and every major system platform, from IBM, Intel, AMD, Dell, Sun and HP.

Not coincidentally, those companies are exactly the companies with whom Sun has signed OEM relationships - so the integration of MySQL into Sun's ecosystem and channels will be exceptionally straightforward.

So how do we plan to go after this new opportunity? In a few fundamental ways.

We've historically worked at arm's length to optimize MySQL on Sun's platforms. Just as we did for Oracle in their early days, our performance engineering teams will sit (virtually) with their counterparts in MySQL and in the community, leveraging technologies such as ZFS and DTrace (which we didn't even have in the Oracle era) to ensure Sakila flies - along with the rest of the LAMP stack (from memcached and php, to the broader ISV community around MySQL). MySQL is already the performance leader on a variety of benchmarks - we'll make performance leadership the default for every application we can find (and on every vendor's hardware platforms, not just Sun's - and on Linux, Solaris, Windows, all). For the technically oriented, Falcon will absolutely sing on Niagara... talk about a match made in heaven.

Second, I've asked our team to negotiate an arms' length commercial transaction, prior to closing, that allows us to provide Global Enterprise Support for MySQL - so that traditional enterprises looking for the same mission critical support they've come to expect with proprietary databases can have that peace of mind with MySQL, as well. This gives traditional enterprises a world of new choices and competition. As I said, if there's one item customers have been asking from us for years it's more innovation in the database marketplace - we're now in a position to respond.

Third, we'll be announcing some exceptionally attractive platform offerings, leveraging the success Lustre and ZFS, along with new systems platforms (like the new 48TB Thumpers and 64 thread Niagara2 machines) to deliver eye popping price performance. Ultimately, that's what customers want - real value, supported globally, with quality and performance. Most importantly, MySQL's partners are going to be the centerpiece of our solutions and offers - just as we've done with Solaris and Java, we're going to work very hard to make our ISV's wildly successful as we broaden the market. It takes decades to build a broad partner portfolio, and they are an enormous part of the value customers see in Sun, and we certainly see in MySQL.

And finally, this acquisition will kickstart a new set of investments Sun will be making into the academic community. Why universities? As we continue to invest in open source software development across the world, it's apparent that nearly all roads lead to academic environments - and it's high time we (as an industry) started watering the trees at their roots. It's one thing to say you're committed to education, it's another to put your money where your mouth is. Within the next 60 days, Greg will be announcing a new set of global research fellowships designed to advance the state of engineering on the internet. (Stay tuned on this blog, and on Greg's, for updates.)

So why is this important for the internet? Until now, no platform vendor has assembled all the core elements of a completely open source operating system for the internet. No company has been able to deliver a comprehensive alternative to the leading proprietary OS. With this acquisition, we will have done just that - positioned Sun at the center of the web, as the definitive provider of high performance platforms for the web economy. For startups and web 2.0 companies, to government agencies and traditional enterprises. This creates enormous potential for Sun, for the global free software community, and for our partners and customers across the globe. There's opportunity everywhere.

To the folks at MySQL, from employees to customers and partners - welcome, and we're thrilled to join you. This acquisition spells the beginning of a new era on the internet.

Starting with the letter M.

Posted on 05:05AM Jan 16, 2008 | Comments[79]

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