February 24, 2003 6:59 PM PST

Sun: Technology should keep faith alive

SAN FRANCISCO--Things have been tough for Sun Microsystems, but Chief Executive Scott McNealy wants analysts to maintain faith in the company because of technology such as "throughput computing" for chips and "Orion" for software.

"The skepticism is at an all-time high right now," McNealy acknowledged Monday at the company's annual analyst conference here, but he exhorted, "Don't write us off too quickly...We've had a lot tougher times than today."

The usually brash McNealy adopted a restrained, guarded tone in his introductory remarks, but executives expected to tout new hardware and software are likely to project more optimism on Tuesday. Two main features will be "Orion," Sun's plan to integrate more of its higher-level software into its Solaris operating system and sell it on a subscription basis, and "throughput computing," the use of chip technology from Sun's acquisition of Afara Websystems to let a single processor handle the work of 32.

Sun's throughput computing plan, which sources expect to be formally unveiled April 10, has grabbed the attention of some analysts.

"They have the most ambitious processor road map I've ever seen in my life," said analyst Peter Glaskowsky, editor of The Microprocessor Report. "It makes the (forthcoming) UltraSparc IV and V look like footnotes in Sun's history."

Santa Clara, Calif.-based Sun is coming back to an even keel after several years of adjusting to the bursting of the dot-com bubble and the recession that struck immediately afterward. The manufacturer of higher-end server computers is completing a second major round of layoffs and, according to analyst expectations, will have about the same revenue--roughly $12 billion--for the current fiscal year as for fiscal 1999.

Sun has more competition now, though. In addition to Microsoft, which continues to rake in billions of dollars of profit each quarter, Sun faces an awakened IBM as well as chip giant Intel, whose processors now sell well for servers. Dell and IBM gained server market share in 2002, where Sun lost.

Throughput computing
Sun's throughput computing plan is designed to vastly increase the power of servers and thus to reclaim momentum Sun has lost to Intel, Glaskowsky said. Each chip based on the Afara design, code-named Niagara, will have eight processors, and each processor can handle four independent computing operations, called "threads."

The technique, which won't result in chips larger than those from competitors, sacrifices the ability to perform one task extremely quickly for the ability to do multiple independent tasks simultaneously, David Yen, Sun's executive vice president for processors, said in an interview Monday.

Sun's Niagara chips will debut in lower-end servers by 2005. Then a second generation design sometime later will merge the Afara technology with Sun's main UltraSparc line and become the foundation of Sun's future chips, said Andy Ingram, vice president of marketing for the microprocessor division.

Microprocessor Report analyst Kevin Krewell believes the Afara technology will be integrated with Sun's current UltraSparc line in the time frame of UltraSparc VI--a chip two generations beyond the UltraSparc IV and due later in 2003.

Ingram said the Niagara technology will provide lower-end servers with chips that have 15 times the power of the 650MHz UltraSparc IIi used in Sun's blade servers. The follow-on will have 30 times the power of the newest 1.2GHz UltraSparc III, he said.

Yen said Sun is better positioned to accommodate a technology such as Niagara because Solaris can manage the schedules of more than 200 threads today--the number a top-end Sun Fire 15K server accommodates with the new UltraSparc IV.

IBM and Intel also are pursuing ways to boost the number of threads their processors can handle simultaneously.

Stability amid change
Sun has changed dramatically in the last year, dropping its argument that its Solaris operating system and UltraSparc processors are sufficient for all computing needs and letting the Linux operating system and Intel processors into its product line. But essentially the company is sticking by one of its mainstay principles: Leave the computing work to large central servers, not to desktop machines.

In McNealy's vision, rather than each person having his or her own desktop computer, many people will share centralized servers. They'll carry not laptops but tokens that will grant them access to their private computing resources. "The shared resource model blows the doors off" the dedicated model, McNealy said.

As an alternative to PCs, Sun has loudly trumpeted its Sun Ray system, which does no processing on its own but instead relies on a central server. Sun is working on a future version called WAN Ray that can use wide-area network technology such as DSL lines or cable modems to connect to the server, McNealy said. Ultimately the idea will work with wireless networks as well.

In other areas, McNealy predicted a day when people will carry cards or chips activated by radio waves from sensors at hotels, gas stations and any number of other places. Once radio frequency identification (RFID) chips cost from 3 cents to 5 cents, "You'll put them on everything," he said.

And McNealy does mean everything. His dog has an identification chip embedded between her shoulders, and McNealy said humans eventually won't be different. "They're going to slap that baby's bottom, then slip an ID chip in their neck or between their shoulders so you can keep track of your kid," McNealy said. "That's not Big Brother; that's dad."

Sun is an active member of a consortium do develop RFID tags, but some fear the technology will erode people's privacy.

Sun hopes to profit by selling the computers needed to handle the crush of information streaming in from RFID tags, cell phones and many other computing gadgets.

On the front lines, server makers are cutting prices, but Chief Financial Officer Steve McGowan argued that Sun is leading the charge, not being dragged along. He cited as evidence the increase in Sun's gross margin from 36.6 percent in the last quarter of 2001 to 43.3 percent in the last quarter of 2002.

"We're bringing that pricing pressure to our competitors. They're not bringing it to us," McGowan said.

Sun will be able to cut prices further, McGowan said. In fiscal 2004, which will end June 30, 2004, Sun has the opportunity to save $800 million through better management of cash, component cost reductions, streamlined operations, and other operations. Some of that saved money will be passed on to Sun customers, who will see quarterly price cuts of as much as 40 percent, McGowan said.

McGowan presented several scenarios--not financial expectations, he cautioned--based on current Sun financial performance that showed the company achieving various levels of profitability in fiscal 2004. With level revenue of about $12 billion along with current expenses and gross margins, Sun would have about $300 million in net income and $1 billion cash from operations.

With more optimistic projections--$13 billion revenue, 1 percent better gross margins, and operating expenses $200 million lower--the company would have about $500 million in net income with $1.4 billion cash from operations.

 

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