April 16, 1999 3:35 PM PDT

Sun sees payoff from AOL deal in 2000

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Sun expects it'll be another year before its partnership with America Online starts to pay off.

The complex deal, a software partnership that grew out of America Online's acquisition of Netscape, will have a neutral effect on earnings per share for the next four quarters, before starting to produce profits in the two years after that, chief financial officer Mike Lehman said after the company reported its third-quarter earnings yesterday. (See related story)

"We're invested heavily" in the alliance of 2,000 to 2,500 total AOL and Sun employees, added chief executive Scott McNealy. "I think it's going very well, but don't expect it to hit escape velocity for another 12 months."

Sun reported net income of 36 cents per diluted share on revenue of $2.936 billion, edging past Wall Street estimates of 35 cents per share expected by the consensus of analysts surveyed by First Call. The earnings per share figures reflect a two-for-one stock split April 8.

Revenue grew 24 percent to $2.94 billion from the like quarter a year ago, and net income grew 26 percent to $291.4 million from the like quarter a year ago.

Though Sun stock dipped $5.50 to $54.9375 in trading today, the stock overall has been rising steadily since October, reaching an all-time high of $72.5 per share last week. Analysts attribute the performance to the company's successful strategy of supplying infrastructure for the Internet.

The company hasn't been affected by the woes that afflicted Compaq, but Sun is still being cautious for upcoming quarters, McNealy said. "We're not expecting any major problems in calendar 1999," but still have to worry about several big issues, such as the Year 2000 problem, the rollout of the company's new "Cheetah" UltraSparc III chip, the AOL alliance, and sales in Japan.

McNealy described a "heartbreak hill" that some computer makers are facing, but added, "If there is any slowdown, we think we can take huge advantage of it."

Overall, Sun was bullish on its future. "Clearly network computing 20 years from now will be a very, very, very big business compared to now. I think we've got a pretty good shot at being one of the big two," McNealy said, drawing a parallel between computer companies of the future to the Ford and GM automobile titans of today.

The company hired 1,350 new employees in the last quarter, and plans to continue at a somewhat more modest rate during the current quarter, Lehman said.

Much of that hiring is increasing the employee count in Sun's services business, which now has 1,500 employees. The services area is a part of the business where McNealy admitted being behind IBM's famed global services division, but services proved profitable for Sun in the last quarter, with more companies willing to buy expensive "platinum" level support.

Other hiring will be in research and development, sales, marketing, and advertising, Lehman said.

Cheetah gaining speed
Sun will be investing heavily in the upcoming UltraSparc III chip, code-named Cheetah, McNealy said.

The first prototypes will be etched into silicon this month, said chief operating officer Ed Zander, and the chip will arrive in systems in the first half of calendar year 2000.

The chip will debut at a clock speed of 600 MHz and a feature size of 0.18 microns, Zander said. It has 25 million transistors and is designed to work by itself or teamed with hundreds of brethren.

"Cheetah has taped out, along with the chipset," McNealy said. "Now the heavy lifting and heavy spending begins." Developing a chip is considerably cheaper than manufacturing it and turning it into a selling product, McNealy said.

Merced, Intel's first 64-bit chip, is following a similar time line, but Zander said: "We don't believe Merced is even close" in terms of performance.

Zander also took a potshot at the other half of the Wintel duopoly, saying that Sun's Solaris 7 Unix operating system is two to three years ahead of Microsoft's Windows 2000.

Fighting for the storage market
Countering the hype about storage area networking, McNealy offered a more conservative vision for its plans in handling companies' storage needs.

Storage area networks (SANs) split off storage into a separate pool of disk drives, a big change from the currently popular setup where each server has its own storage system.

But McNealy said that in the future companies will rely ever more heavily on their computer systems and will not be able to afford having them go down. As a result, they'll be disinclined to "mix and match" components from different vendors, McNealy said, and Sun will benefit because it sells both storage and servers guaranteed to work well together.

The strategy is aimed down the throat of Sun's chief storage competitor, EMC, which Zander acknowledged as being "a tough competitor."

In other news
Sun has a vast product line, and the company accordingly had a long list of updates for analysts. Among the announcements:

 Sun said demand is still strong for its high-end Starfire server.

 About 10,000 companies and individuals have signed up for Sun's Community Source License program, Zander said. The program lets people look at the source code of Java and other Sun technologies without having to pay royalties unless products using the technology are sold.

 A total of 200 companies have signed up through the Community Source License program to look at Sun's Java chip designs, Zander said.

 Since Sun acquired NetDynamics last fall, the installed base has increased tenfold, McNealy said. NetDynamics makes software that delivers customized Web pages by fetching information from a company's servers.

 

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