March 26, 2007 4:43 PM PDT

Sun hopes for growth from Project Redshift

PALO ALTO, Calif.--Sun Microsystems, having returned to revenue growth after years struggling, is planning to catch the next wave of growth with an effort dubbed Project Redshift.

The project divides the computing world into two broad camps. First are traditional computing customers who are happy that Moore's Law steadily pushes down computer prices. Second are those whose growth rates and reliance on technology give them an appetite that far outstrips what the industry can supply.

"Systems for payroll, general ledger, enterprise resource planning every year require less and less infrastructure. You don't want to hang out too long in that aspect of the marketplace," Sun Chief Executive Jonathan Schwartz said at a meeting with reporters here on Friday. "You have to jump to the other side of Moore's Law, to find the customers who are 'redshifting,' pulling away from the rest of the market."

Redshift refers to the color change of light from galaxies that are moving away from Earth because of the universe's expansion; galaxies farther away are shifted more dramatically to the red than those nearby. Sun aims its research and development toward these customers, Schwartz said, yielding products such as Project Blackbox, a data center conveniently packaged in a shipping container.

"At least from a marketing perspective, Sun likes to be seen as supplying the cool kids with their gear," said Illuminata analyst Gordon Haff. However, although Sun has stuck with the idea for years in various forms, it's hardly unique in trying to tap into the market today. "Is there any big supplier who isn't going after the hyper-growth companies?" Haff said.

Schwartz began talking about the idea in October, and Chief Technology Officer Greg Papadopoulos attached the Redshift name to the plan during the company's analyst summit in February.

The Redshift concept applies to Internet-based start-ups that are growing fast, Schwartz said, pointing as an example to Twitter, which uses Sun technology for its service of broadcasting a person's text messages to subscribers. "The thing I find so fascinating about the network is that it has become so consumerized that social phenomena can take off like a lightning storm," Schwartz said.

But it's not just for Web 2.0 start-ups. A prime market is high-performance computing, not just in scientific research but also in business operations such as FedEx's work to make its package delivery as efficient as possible, Papadopoulos said. "High-performance computing has insatiable demand. If you halve the price of computing, people consume twice as much," he said.

Internet-based businesses can fit the Redshift model, Papadopoulos added, pointing to old-school sites such as eBay and Amazon.com as well as newer arrivals such as Salesforce.com and Microsoft's Windows Live. For now, though, the bulk of Sun's business comes from traditional "blue-shift" companies.

Some might recall a parallel to another expansionist era, the dot-com bubble. Sun loudly touted itself as being "the dot in dot-com," a catch phrase it dropped like a hot potato after the bubble burst and Sun's revenue and profits disappeared with it.

Schwartz has argued more than once that the company shouldn't have backed away from the line.

But Sun did lose track of important business priorities in the dot-com bubble, Schwartz said: "When you're growing 60 percent, the fish are jumping in the boat. You're focused on building the biggest boat you can. You're not focused on navigation."

Schwartz took over as Sun's CEO nearly a year ago and has been very focused on navigation. The company's pole star is an operating margin of 10 percent in fiscal 2009, which ends in June 2009. Operating margin--a measure of financial health consisting of operating profits as a percentage of revenue--determines how much money a company generates for cash reserves, dividends or other purposes.

There are some uncertainties about how the company will reach the goal. Schwartz said he wants to attain it by improving profit margins, whereas Chief Financial Officer Mike Lehman has a strong focus on reducing Sun's expenses.

'It's turned 180 degrees around'
The company reported an operating margin of 2.9 percent in its recent quarter, which ended December 31, and has a 4 percent goal for the last quarter of the current fiscal year, which ends June 30. The steady progress has helped Sun with external matters such as recruitment and sales and internal matters such as employee morale and motivation, Lehman said.

"A year ago, the conversations were 'Are you going to be around?' Now it's 'How soon are you going to make 10 percent?' It's turned 180 degrees around," Lehman said.

Schwartz pointed to hiring as another example of Sun's restored fortunes. John Fowler, executive vice president of Sun's server group, issued about 70 job offers to college graduates he wanted to hire, and 62 accepted, Schwartz said.

Also at the event:

• Douglas said that in an effort to reduce its greenhouse gas emissions, Sun has a goal of reducing the amount of carbon dioxide it produces by 20 percent by 2012 compared with its 2002 levels. Doing so will save Sun money as well as reduce its environmental damage, he said.

• Schwartz declared Oracle's attempt to sell a Red Hat Enterprise Linux clone a dud. "That's had little to no effect on the marketplace. The barriers to entry to compete against an operating system are a lot higher than they were historically," Schwartz said.

• Sun will continue to spend more on research and development than most rivals. Computing power is a commodity, but that doesn't mean that money can't be made selling computers.

"Every large company that monetizes a commodity--in financial services, oil and gas, or power--every single one spends an enormous amount of money on R&D. Otherwise, you have no differentiation," Schwartz said. "A few companies lost the ability to do that," he said.

• "A little over half of the customers" Sun has found through its try-and-buy program--in which customers may use Sun hardware free for 60 days--have never before bought anything from Sun. The company doesn't have a good measurement of the fraction of try-and-buy customers that buy the product, though one conversion turned into a $2 million purchase, Lehman said.

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Jonathan Schwartz, Sun Microsystems Inc., dot-com, high-performance computing, high-performance

 

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