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Software // Enterprise Applications

Revenue Growth And Profitability Elude Sun

CEO McNealy points to improving margins and software sales to startups as hopeful signs of a turnaround.

Over the past year, Sun Microsystems has cut half a billion dollars in costs, introduced computers that once again impress CIOs with their speed, and struck deals with Microsoft, Google, and other tech companies to help its products comply with industry standards. Now the 25-year-old Silicon Valley institution needs to ramp up sales growth and turn a profit if it hopes to capture enough market share from Microsoft, Intel, IBM, and other competitors to regain some of its former influence in the industry.

"We need to see some revenue growth, there's no doubt about that," said CEO Scott McNealy at a meeting with reporters at Sun's Menlo Park, Calif., headquarters Friday. And "we desperately need to get to some level of GAAP [generally accepted accounting principles] profitability," he added. For its second fiscal quarter, which ended December 25th, Sun reported a $223 million loss on sales of $3.34 billion.

To get profitable again, the company needs to raise prices on its software--never a strong suit in a company that relied on sales of high-priced servers during its dot-com heyday--and convince more customers to switch from computer systems sold by IBM and Hewlett-Packard to Sun's Sparc chip platform and Solaris operating system. Sun's formula also relies on its new "Galaxy" server, which has achieved fast benchmark results running Advanced Micro Devices' Opteron microprocessor.

"The problem with those software revenues is we're basically pricing it all at zero," McNealy said. But he pointed to deals with customers including General Motors, General Electric, FedEx, and American Express as examples of Sun's ability to sell long-term "subscription" agreements for its Java middleware and other software, along with its computers.

McNealy won't say when Sun will again turn a profit. "I don't want to be banging a tin cup on a bar" for guessing wrong, he said. But Sun president Jonathan Schwartz said Sun's gross margins improved to 42.6% last quarter, up from 39% a few years ago. And McNealy said selling software to startups building their businesses on new Web technologies is supplementing Sun's traditional corporate sales. Sun recently disclosed a deal to sell computers and software to Ning, a startup formed by Netscape founder Marc Andreessen.

"We understand the disconnect between what the world thinks we're doing and what we're doing," McNealy said. Revealing too much of Sun's plans could also give competitors an edge, he added. At the same time, Sun "can't afford" to be as secretive about its plans as companies such as Apple Computer and Google, which generate lots of media attention, said McNealy, because its business customers demand more disclosure. "So we lose a little bit of the power of the secret" to generate buzz about products, he said.

And what about Sun's plans for a technical cooperation deal it signed with Google last fall? "He doesn’t want us talking about it," McNealy said of Google CEO Eric Schmidt. The two companies last October agreed to distribute Sun's Java software with each download of Google's Web browser toolbar, but indicated the deal could also include sales of Sun hardware to Google and an agreement for Google to distribute Sun's StarOffice productivity suite. "I'd love to talk about everything we're doing over there," said McNealy. But he pointed to Google's $115.17 billion market capitalization versus Sun's stock market value of $10.25 billion. "The last guy I want pissed off at me is Eric Schmidt," he said.

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