February 11, 2004 6:00 PM PST

Sun plans revenue growth, cost cuts

SAN FRANCISCO--Sun Microsystems, still getting back on its feet after enduring three years of financial punishment, is planning new revenue growth and cost cuts, Chief Executive Scott McNealy and other executives said Wednesday.

"The way we're going to fix this company is through revenue growth," McNealy told analysts at Sun's analyst conference here. Specifically, Sun expects to piggyback more storage gear and software to its servers, lure away Hewlett-Packard server customers, branch out into new server markets and increase recurring revenue that customers pay predictably year after year, he said.

The company also plans to cut costs. CFO Steve McGowan said the company is on track to cut operating expenses by $250 million in fiscal 2004, which ends June 30, and plans to cut costs by at least that much again in fiscal 2005.

Sun profited mightily during the late 1990s, when Internet mania and economic growth drove spending on the high-end computers in which the company specializes. Sun's revenue grew as fast as 60 percent. But the Santa Clara, Calif.-based company suffered proportionally when the spending stopped and the economy went into recession; the company has had 11 straight quarters of declining revenue and competitors IBM, Dell and HP smell blood.

One key revenue-growth plan is increasing the "attach rate"--selling servers, storage and services along with Sun's core server products, McNealy said.

Robert Youngjohns, head of Sun's sales group, said the attach rate is 27 percent for storage and 50 percent for software.

One way to increase the attach rate is to focus more on selling collections of servers, software and other gear set up for a particular job. Sun is increasing its emphasis on these reference architectures, introducing five new ones at a quarterly product launch event Tuesday. For example, one new reference architecture is for a calendar and e-mail server to replace Microsoft Exchange, and another is for data warehouses that store and analyze customer buying patterns.

"I don't understand why the attach rate isn't 90 or 100 percent," McNealy said. "It's kind of like engine attach rates in the automobile industry. There's a lot of dollars there."

The automobile industry--McNealy's favorite metaphor--also illuminated another Sun revenue push: recurring revenue. "The auto industry...never thought about the concept of recurring revenue," selling a car once but failing to benefit from future revenue sources such as gasoline or radios, he said.

"Sun is going to try to avoid that missed opportunity that happened in the auto industry. You're going to hear the words 'recurring revenue' a lot over the next few years," as Sun sells subscriptions for hardware, software and services such as remote management, McNealy said.

McGowan said a third of today's revenue is recurring, but Sun's goal is two thirds.

Sun also pointed to its HP Away program as another revenue source as the company tries to attract customers that bought HP's AlphaServers, which are being phased out. Sun announced in November that it had attracted 50 such customers and said the number now has climbed to 80.

But Sun isn't alone here in trying to profit from the AlphaServer customer base. And IBM is likely to get a larger share of those customers because of its September acquisition of Sector7's services business to help customers translate their software to a new system, said Forrester analyst Brad Day.

Cost-cutting
Reducing expenses means more of Sun's revenue would go toward profits or lower prices.

One focus for cost-cutting is outsourcing--paying others to handle its own internal operations such as payroll--an area in which Sun lags behind the industry by four years, McNealy said. "There are a lot of things we're doing that are not our core competency that we just don't need to be doing," he said.

Real estate costs also will drop, McNealy said. Through Sun's iWork program, many employees don't have their own offices or computers but take the first empty cubicle they find when they arrive at work, the same way they take a parking spot.

A third of Sun's employees don't have offices, and Sun will increase it to two thirds or more, McNealy said. In addition, it will close many offices that have fewer than 20 employees, and it's looking at consolidating its labs to fewer sites, McGowan said.

 

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