Understanding the Changes We're Driving

Please see the Safe Harbor Statement at the bottom of this page.

By now you've all seen the press release we issued today, outlining a plan approved by Sun's board of directors - in which we'll be lowering cost, accelerating profitability, and as a part of both, implementing a workforce reduction of up to 5,000 employees. At the outset, I know these changes will be tough for many employees, but I'm also convinced they'll yield a more valuable company for customers, shareholders and our remaining employees, one that's leaner and more efficient.

We've also provided insight into Sun's operating income goals for 2007, and a framework for thinking about our performance beyond that point. We've also changed elements of our corporate governance - these actions are designed to make Sun a more transparent organization, and one more responsive to long-term shareholders, and simpler to understand.

I'd like to review the thought processes that led to these decisions, and provide color on our going forward market focus and R&D priorities.

Just after last quarter's earnings call, I initiated a top to bottom review of our markets, our R&D portfolio, and our overall corporate resourcing. You've already seen management and organizational changes resulting from that work, reported in the past few weeks.

At a top level, these reviews were focused on simplifying Sun - making choices to clarify our priorities, speed up our progress, and drive the transparency that gives all of you more insight into where we're headed. It's been similar actions, over the years, that have enabled us to expand gross margins and deliver top line growth. But these are all points along a path, a path we're now accelerating.

So first, I'll address Sun's market focus.

Our industry is littered with companies that try to be all things to all people. That's not Sun.

In my first 30 days as CEO, I've spent a great deal of time with leaders from among our global customers – and having just completed our most successful JavaOne conference ever, with our most strategic constituency, the Java and Solaris developer communities.

I've heard a consistent message - the internet's growing at an incredible rate - and for many of our customers, the network has become core to how they engage their markets and create competitive advantage. Those are our key customers, those that see network computing as a vital element of their strategy, those pushing the limits of scale and load, and those that see IT innovation as anything but a cost center.

As we began nearly two years ago, we will continue to simplify our coverage models, adding expertise where we can grow value and share. As you've seen in Gartner Dataquest's recent Worldwide Server report, Sun did just this, gaining share with both UltraSPARC systems and x64 systems against our leading competitor/partners. We absolutely believe we can continue to grow as we focus our field and partnering resources on the right opportunities.

We will focus on those companies, from startups to global players, that see network computing as their principal route to market, principal vehicle to differentiate, and principal competitive weapon. We expect to focus our coverage in these accounts, while streamlining our efforts to extend our coverage with the world's most attractive partner community. And to be clear, we are adding coverage and technical specialists, while continuing to reduce redundant or duplicative functions. The market isn't shrinking, nor will our field presence, channel focus or partnering efforts.

Next, I'd like to focus on our research and development priorities.

As many of you are aware, Sun has one of the strongest R&D organizations in the world - one we've sustained while our competitors have cut - leaving us with an operating system and microprocessor platform which makes our competitors begin to appear as partners. We have some demonstrable technology advantages... energy efficiency, operating systems innovation, dramatic gains in developer adoption. That's certainly the cornerstone of our recovery.

And with those assets, we serve two constituencies – developers, who create content for the network, and deployers, who purchase and operate software and hardware infrastructure in the world's datacenters. I will continue to stress that revenue for Sun is a lagging indicator of the adoption of our core developer platforms – both of which we are reinforcing with today's actions.

We will decrease some non-core R&D, and specifically duplicative or redundant infrastructure and management processes, but we are expecting to increase our focus on developers, and on investments in Java innovation, and the open source Solaris operating system. The adoption of those technologies will continue to define large revenue opportunities for us in companies like eBay, Motorola, General Motors and American Express – all of whom, by making decisions long ago to leverage Java and Solaris, have become very significant customers - in software, in systems, in storage and services.

As the world's largest free and open source company, we expect to monetize a portion of what we freely distribute through service and support contracts, along with traditional software licensing; and through volume as well as enterprise systems and storage sales. We expect the internet marketplace to grow, and we expect our core intellectual property, for developers and deployers, to give us a significant competitive advantage against those without comparable assets. Simplicity, scale, automation and security will continue to be our differentiators.

You will see in today's actions that we will be simplifying our product line, and reducing duplicative R&D – to help you interpret that, we will build all products at Sun from Java, Solaris, StorageTek and from our newly unified SPARC and x64 SunFire platforms. I'd like to briefly point to three products that represent the future of such systems innovations. The recently unveiled Niagara servers, the StorageTek Titanium archive platform; and lastly, an upcoming extension to our NAS offerings, code named Thumper.

Having anticipated today's datacenter focus on green computing, Sun began investing years ago in energy efficiency - as a result, our Niagara servers now operate at less than half to a fifth the power draw of our competition (potentially qualifying our customers for carbon credits). As I mentioned earlier, many of you saw the share gains Gartner reported for Sun last week – we believe we can continue to grow share, having recently taped out an even more energy efficient follow on to Niagara - we are adding support for Linux and BSD operating systems on our SPARC platforms, opening new markets for the same platform investment supporting Solaris, leveraging the same R&D over a broader opportunity.

Secondly, the StorageTek T10000 is the highest scale and security archive offering in the marketplace – it's leveraged by an array of customers, from governments to on-line portals, and many of the world's largest institutions. But you've all heard disaster stories from banks or media companies that have "lost their tapes," revealing what was supposed to be protected consumer information. As a part of Sun, we were able to leverage our systems innovation to add high security encryption to these systems, largely eliminating the risk of losing data. Integrating our StorageTek platforms with Sun's market leading Solaris and Java Enterprise offerings allows us to solve a spectrum of business problems our storage only competitors cannot. This innovation was a matter of linking existing technologies - and will be a focus area while we reduce other proprietary approaches. And again, StorageTek systems will be built atop SunFire servers running Solaris, while maintaining their mainframe heritage and interoperability. Leveraging the same R&D over a broader opportunity.

Finally, and arguably the best example of the alignment of Sun's systems innovation is a project we'll be announcing in late June - code name Thumper. Thumper is a SunFire server, running Solaris and its 128-bit ZFS file system, that packs 24 Terabytes of storage into a miniature package - allowing Solaris and Java applications to run directly on the storage device at breathtaking speed and price points. It's a perfect example of combining our software and hardware expertise, with an existing supply chain, to deliver a broader market, greater margins, and new customers - leveraging common IP, over a broader opportunity. We'll be announcing complete details at the end of June.

To repeat, we will be simplifying our product line, our supply chain, our development and management processes – while retaining a focus on open source innovation, horizontal scalability and security, and on service automation around our Network.com Grid. All while we continue to seamlessly interoperate with existing systems, from mainframes to Microsoft Windows.

As I stated above, we've improved gross margins over the past couple of years - we will seek to generate more value from our R&D going forward.

Finally, I'd like to leave you with a couple notes on Transparency and Business Focus

You will hear me and Sun's Chief Financial Officer, Mike Lehman, begin to make projections of our going forward business – we have an increasing confidence in the stability of that business, and as we continue to see growth in our core developer offerings, we have increasing line of sight into new markets and customer opportunities. We will reflect that clarity and transparency to the best of our ability.

Today's changes will result in a significant reduction in non-core or redundant R&D, field and corporate resourcing – with significant synergies arising from the acceleration of acquisition integrations into Sun. Again, we expect these changes to have little to no impact on customers, and instead to create more opportunities for business partners and suppliers to join with Sun in serving the global market.

We have believed for the 24 years of our existence in a singular vision – the network is the computer. That vision remains unchanged, and if anything, today's refinements to our market focus, our R&D portfolio, and to our overall business model, drive us even closer to fulfilling it.

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Safe Harbor Statement

This blog contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding the future results and performance of Sun Microsystems, Inc., including statements regarding Sun's growth plan, Sun's return to profitability, future growth, areas of future investment, the competitive advantage that results from Sun's intellectual property and the monetization of such intellectual property, the attributes of and benefits to be derived from future products, continued gains in market share and synergies to be derived from acquisition integrations. 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 Sun's projections and forward-looking statements include: failure to achieve expected cost savings within the expected time frames; increased competition; failure to rapidly and successfully develop and introduce new products; Sun's reliance on single-source suppliers; risks associated with Sun's ability to purchase a sufficient amount of components to meet demand; inventory risks; risks associated with Sun's international customers and operations; delays in product development or customer acceptance and implementation of new products and technologies; Sun's dependence on significant customers and specific industries; Sun's dependence on channel partners; risks associated with Sun's tape products; and failure to successfully integrate acquired companies. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including Sun's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and Sun's Quarterly Reports on Form 10-Q for the fiscal quarters ended September 25, 2005, December 25, 2005 and March 26, 2006. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements.

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Posted on 02:35PM May 31, 2006 | Comments[31]

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