Sun Microsystems Q1
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Sun Microsystems Q1
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> Q1 Results ALEXANDRIA, Va, October 17, 1996/FOOLWIRE/ Sun Microsystems reported on August 15th results for the first quarter which ended September 29, 1996.
Revenues for the first quarter were $1.859 billion, up over 25 percent from the $1.485 billion reported for the corresponding period a year ago. The company's first quarter net income increased more than 45 percent to $123.4 million, compared with $84.7 million in the first quarter of the prior fiscal year. First quarter earnings per share was $.63, an increase of 50 percent from the $.42 reported for the same period a year ago.
"These record results can be attributed to our long-time dedication to enterprise network computing," said Scott McNealy, Chairman, President and CEO of Sun Microsystems Inc. "As the industry increasingly embraces our motto `The Network Is The Computer,' our market opportunities continue to expand. We are now entering the era of Java computing that features mission-critical servers and thin network clients. Sun is again leading the charge."
Michael E. Lehman, Sun's Chief Financial Officer, said, "Our current fiscal year is off to a solid start. Customers are choosing Sun because of our commitment to open interfaces, and the strength of our UltraSPARC-based servers and workstations, powered by our software product families: WorkShop, Solaris, and Solstice. The investments that we have been making in worldwide service and support capability, as well as higher levels of demand creation resources, have been paying off. The result is that Sun is being viewed as a pure play leader of network computing for the enterprise."
Lehman concluded, "We are enthused about the market opportunities that are becoming increasingly available to us. Our financial position and business model are strong, enabling us to make investments in research and development across all our product lines as we develop and enhance the Java computing paradigm."
REVENUE BREAKDOWN AND INCOME STATEMENT ITEMS
Geographically, revenue growth in Europe was highest, with a year/year growth rate of 26.6%. US growth was 25.8%; rest-of-world, dominated by Japanese sales, showed growth of 22.4%.
Gross margin was 47.7%, up 300 basis points (each basis point = 1/100th of a percentage point) sequentially and 270 BP year/year. Higher margins resulted from strength of the product line and sales in mid-high range UltraSparc enterprise servers, particularly the E3000 and 4000 servers.
R&D was $186 million, or 10% of revenues. SG&A (selling, general, and administrative expenses) expenses were $525 million, or 28.2% of revenues. This expense rose 50 BP, as a percentage of sales, from a year ago and was up 420 BP sequentially. This growth in expenses included growth in enterprise level field sales, service, and support; demand-creation programs; application performance tuning; software partner relationships; and "business profit simplification efforts."
Operating income was $176 million, or 9.5% of revenues, which is a new Q1 record net margin..
SHARE REPURCHASES, HEADCOUNT
Of the $696 million spent to-date under the company's 1995 stock repurchase authorization, 4.4 million shares were purchased in Q1 FY 1997 for $236 million. Headcount was up sequentially by 781 people and year to year, up 3,300+, for total Sun employment of 18,188. Headcount additions came primarily in the areas of sales, R&D, and demand-creation resources. 230 persons brought on during the quarter came from the Sparc business of Cray Research, which was acquired by Sun on July 1, 1996.
CUSTOMER WINS AND PRODUCTS
Sears, Roebuck chose Sun over Hewlett-Packard and IBM to run its payroll management applications. Raytheon selected the company's workstations for exclusive use in that company's supply agreement for the FAA's air traffic control upgrade. Thousands of UltraSparc stations running the Solaris O/S will be used for the new system.
Deutsche Bank chose Sun stations to replace its IBM workstations for training and risk management applications. Other deals included Swiss Federal Railways for a large contract; Canada's CI Mutual Funds; Raychem chose Sun servers to run database applications for up to 5,000 users; Hughes Network Systems chose Solstice; and @Home will use Ultra Enterprise Cluster as the server backbone for @Home's internet service.
Backlog on the UltraSparc-based servers, introduced in the June quarter, was larger than expected due to high demand. Backlog at the end of June was $522 million. In the September quarter, the company worked down that backlog but still sees room for improvement on delivery lead-times. The longest lead-times are now 4-5 weeks, which are much shorter than last quarter. Backlog reduction was mainly responsible for revenues growing 5% faster than bookings. Channel inventories look fine.
Gross margin improvement was dependent upon better product mix, including higher server sales, competitive position, and decreasing component costs. One point of the sequential gross margin improvement was directly related to softer memory prices. This will effect Sun's pricing, though, as the company has announced price cuts in memory products, which will impact the price of servers and other products with which memory is shipped.
One point of the gross margin expansion was offset by a one point increase in SG&A expense to reflect the re-classification of Sun service employee expenses. Overall operating spending, as a percentage of revenue, reached its highest level in recent years to accommodate planned process improvement spending growth in Systems CC and Sun Service, the company's two largest businesses. This spending includes development of a new suite of applications, supplemented by spending from a number of outside partners.
Headcount at JavaSoft should increase to 500+ by the end of the fiscal year.
BALANCE SHEET COMMENTS
The company made minimal share repurchases under a systematic share repurchase plan designed to offset dilution from employee stock options grants and excercises. $450 million in stock will be bought back under that plan over the next three years. This is one of two re-purchase plans designed to offset ESOP dilution. Total repurchases during the quarter, under all repurchase plans, amounted to $270 million. Over the last three years, Sun has repurchased 64 million shares, for $1.3 billion, under all plans over the last five years.
Accounts/receivable DSO (days sales outstanding) rose to 63 days, up from 56 one year ago. Most of the increase was due to sales made late in the quarter.
COMMENTS FROM CHAIR, CEO SCOTT McNEALY
As WindowsNT becomes stronger, so does Sun. There are no monopolists siphoning off monopoly profits in the networking field right now and no one owns some crucial link in the food chain that would prevent Sun from doing the right things by its customers right now.
Java momentum continues unabated despite the lack of Java marketing. The number of web pages running Java right now is well past the 50,000 mark and was estimated by some market research firms to be in the 80,000 pages area. Growth for the last six months was over 200%. Programming talent continues to flock to Java and the programmer base is estimated to be over 200,000. Serious Windows programmers are estimated to be in the 400,000 area. The number of books in print on Java has surpassed the number on C++. There are 10 books on ActiveX. One in three enterprise developers are using Java. All of Sun's experience with Java will be applied to sales of systems and servers based on the company's ideas on Java Network computing. The company will be hosting a large Java software and systems presentation on October 29, 1996 in pursuit of those networking ideas.
QUESTION AND ANSWER SESSION
There is nothing proprietary about Java that will make the software run optimally on Sun servers. If the company makes excellent software and is able to achieve operating efficiencies with its intellectual property, that is all the advantage they ask for rather than trying to keep a tight grip around the code.
The total percentage of business coming from Sun's CC business did not differ greatly in Q1, having operated in the range of 10-15% of revenues. Higher margins did indicate, though, that mix was favorable in the quarter, but the company did not want to elaborate further for competitive reasons.
Backlog looked normal, as did the channel.
In the coming year or two, the company would like to work down some of the SG&A expense that is being devoted to re-engineering. That bubble should come down as the company integrates some of the strategic solutions to come out of that re-engineering.
On UNIX competitors, DEC has gone to the dark side and is now a grocery store for Wintel computers. IBM keeps plugging along with its installed base. Sun is doing well with Solaris x86 PC business at IBM. H-P is more focused on Wintel, as well.
With Solaris 2.x upgrades, McNealy believes the systems administrators are waiting on version 2.6 to get more bang for the buck in bringing down networks for the upgrade. He doesn't believe that slow movement on version 2.5 is a WindowsNT competition issue.
On Java distribution, the company will go through its traditional re-sellers but is also looking at the possibility of going through telephone companies. Cable companies will also sell Java clients, as will ISPs -- basically whoever is selling a dial, data, or web tone.
By way of illustrating the cost savings available through using Java, Sun said its per-desktop costs of running its 20,000 user Solaris computer network is $5,000. That figure includes hardware depreciation, software amortization for all enterprise and user applications, network costs, and system administrator costs. While that number is much lower than some companies report, the company believes that it can get that cost down to $2,500 in a zero administrator environment. Only 20% of the costs on an enterprise system are in the PC -- McNealy likened that to buying a $40,000 car and paying $200,000 using it and maintaining it over the next few years. Sun thinks that the model for PC computing in the corporate environment is ripe for change.
In the Java environment, users per administrator can get to 500-1,000 instead of the current 200 users per administrator. In this model, small businesses can outsource using service providers or ISPs for systems administration.
Due to weaker macroeconomic factors in Europe which may have hampered competitors, the company believes that its stronger quarter there is due to its competitive strengths.
Since last year's launch of the UlraSparc desktops, the company has been gaining share in UNIX. In the low-end, MicroSparc is doing well, even given the maturity of that product. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |