Positive

Sun Microsystems customers should feel more comfortable with their infrastructures than they have since 2001, because of the company's improved market and financial position. The past year represents an important turning point in Sun's ambition to be known as an open-source company.

Sun continues to reinvigorate its image and move to sustained revenue and profitability. Since 2006, gross margins have risen from 42% to as high as 48.5%, with more consistent profitability (47.3% for nine months ending March 2008).

Sun Microsystems, headquartered in Santa Clara, California, designs and offers technology infrastructure, including servers, storage, software, services and microelectronics. Founded in 1982, it has 33,350 employees in 110 countries; fiscal 2007 revenue was $13.9 billion. Sun focuses its network computing solutions on three major markets: enterprise infrastructure, emerging and next-generation Web services, and high-performance computing, across which it delivers solutions to a variety of industry segments, including government, telecommunications, education and financial services.

Sun's strategy is focused on:

• Growing business with companies that will use the Internet to dominate their markets (such as telecom providers and Web 2.0 companies).
• Delivering software solutions using the licensing principles of open-source and subscriptions services.
• Growing developer communities around its open-source solutions (such as OpenSolaris, GlassFish, Java, MySQL and virtualization [xVM Ops Center]).

Sun is betting on delivering volume-based solutions that will increase its market presence and developer "mind share," and set the stage for next-generation deployments for which it and its partners will be the primary contributors. Sun's business model is more forward-thinking than many of its competitors, but not without risk. Converting free-of-charge software downloads, especially Solaris, into an ongoing revenue stream has proved challenging. Gartner believes that Sun's forward-looking strategy is appropriate and can be a major competitive differentiator.

Sun continues to make uneven progress in revenue growth, profits and margins. Revenue growth in the third quarter of fiscal 2008 (June) was down 0.5% year over year due to a shortfall in the U.S. of approximately $200 million in system sales. Sun’s dependency on a limited number of vertical markets continues to lead to erratic quarter-to-quarter results and needs to demonstrate more consistency. Product cycles appear to be working to Sun’s advantage, but this reliance places a continuous strain on the product groups. Although Sun points to individual wins, we believe it needs to provide more trend data on the turnaround, such as wins of previous migrations, top 100 account spending and growth in next-generation accounts. We expect that the 2009 to 2011 period will be a harbinger of Sun's longer-term opportunities, because recent new-product introductions are intended to appeal to next-generation businesses, and the opportunities from its open-source software and subscription models will be more evident.

Sun has made significant progress in aligning its marketing strategy and tactics with its corporate vision. Branding and corporate communications are strong; field marketing is improving, but support of partner sales needs improvement. During the last year, Sun improved the clarity and consistency of its messaging to the point where few companies do not understand what Sun stands for. Sun's lack of focused vertical marketing has been partially ameliorated with growing vertical centers of excellence in the sales organization, and with a reinvigorated federal government organization with dedicated marketing resources. There are indications that Sun is using its alliance partners more to spearhead a professional service-led entry into key vertical markets.

Sun continues to strengthen its organization. Its executive management team is stable, strong and comfortable working together. With the acquisition of MySQL, it added to its strategic executive team strengths and has filled key executive positions in global sales and services, and green IT responsibility to complement a strong technical competency in hardware and software. It also is leveraging R&D expenses to invest in next-generation system design and innovations (for example, Galaxy servers, Thumper, Constellation, Project BlackBox and chip multithreading), while maintaining its legacy road map through collaboration with Fujitsu and Texas Instruments' fab manufacturing facilities.

For more information on software products, see "Vendor Focus for Sun Microsystems' Software."

Sun (with Fujitsu) introduced the SPARC Enterprise Server series (M Series) in April 2007, although volume shipments did not start until midyear. This is a technically strong family of RISC Unix servers, well-positioned to compete for conventional Unix workloads in terms of performance and functionality with comparable designs from IBM and HP. Based on Fujitsu's SPARC64 implementation of the SPARC architecture, the SPARC Enterprise Server is a necessary, but ultimately tactical, option that fills the midrange to high-end gap until users can assess how Sun's well-publicized Rock development is positioned.

Sun's x64-based series expanded greatly during 2007, with the introduction of Intel Xeon support alongside that of AMD Opteron. Sun remains focused on the high-end (4-socket or higher) segment of the x86 market that represents less than 20% of all x86 server shipments. In addition, an OEM agreement with Microsoft to sell Windows, and the launch of the Sun Blade 6000 family of servers, rounded out the past 12 months. With the launch of the 6000 product line, Sun's desire to succeed in the blade market (for storage, as well as servers) is stronger than its previous attempts, although the ramp-up has been relatively slow to date. Supporting Solaris, Linux and Windows, Sun's x64 server line can extend to 32-core designs. Sun's commitment to x64 technology innovation is unquestioned, and sales of these servers have increased at a brisk rate.

Sun has pioneered the market for dense, multicore processor designs, which it refers to as "chip multithreading" (CMT). Its T1000 and T2000 servers, utilizing the Niagara 1 processor, have significantly increased Sun's penetration of the 1- to 2-socket server market (approximately a $1 billion business). Niagara 2 has been introduced, and a continuation of the road map through 2009 is assured with its next-generation family, called Victoria Falls, which was introduced earlier this year. The UltraSPARC T2 (Niagara) line includes integration and support within Sun's Blade 6000 server chassis. Sun receives a strong positive rating in this category due to the product's forward-looking design and philosophy, strong throughput, and reduced space and power consumption.

The UltraSPARC III, IV, IV+ family has been the core of Sun's server business since 2000, with an excellent record for longevity through in-chassis processor performance upgrades. However, it has lost its competitiveness against IBM Power and HP Itanium. The UltraSPARC architecture is fast approaching the end of its evolutionary life, and the new SPARC64 and CMT servers address most workloads with more-power-efficient and long-lasting designs.

Since the StorageTek acquisition, Sun has altered its disk storage product strategy to extend beyond reliance on Hitachi for the high-end ST9900, and LSI for the midrange ST6000 and entry-level ST2500 systems. Although these products present competitive offerings and are the major source of Sun’s disk storage system revenue, they do not represent products in which Sun is investing its R&D resources. Sun's strategy is to leverage its intellectual property and industry standard hardware technology to develop disk storage products that initially address the network-attached, content archiving and high-performance computing markets. Over time, Gartner expects Sun to broaden this initiative to address markets currently served by its modular disk array storage systems.

Sun is a leading provider of tape libraries and enterprise tape drives. Its enterprise SL8500 tape library, and T9840 and T10000 tape drives represent particularly competitive offerings. Sun is well-established as a provider of virtual tape libraries (VTLs) for the mainframe market; its new VTL products, based on Solaris and ZFS (Zetabyte File System) for the open-system market, offer promising performance and functionality characteristics, which include data deduplication and enhanced physical tape integration capabilities.

Sun has many disparate storage device management products — data management capabilities with strong technologies, such as Lustre, QFS (Quick File System) and ZFS — and an increasing number of data protection OEM and reseller arrangements. Sun has strong core storage management solutions for volume management and clustered file systems (QFS, SAM-FS and ZFS), as well as robust device management for its mainframe offerings; however, Sun has yet to fully deliver on its plan for a more-unified management stack for storage in the open-system segment.

Sun has expanded its vision and strategy for infrastructure management software. Although Sun does not compete in the market for broad heterogeneous IT operations management software, it is investing in some multiplatform capabilities, especially in areas to complement its platforms.

Solaris remains at the center of Sun's hardware strategy. With all of Sun's server and client platforms running Solaris, the operating system continues to hold its market share lead in the Unix market. Sun is conscious of the threat that Linux poses to Unix, and the Sun approach is to enable ever-better Linux coexistence, so that Solaris effectively will become a better Linux than Linux is itself.

Sun Services are designed primarily to support technology at the network, infrastructure and middleware layers, and are used mainly to design, implement and manage its customers' heterogeneous systems. Sun does not offer business or business process consulting, application development (other than in the course of implementing a Sun technology solution), or classic outsourcing, relying instead on strategic alliance partners to handle those services. Attention to Sun Services is almost equal to products, and the role of the service group continues to expand. Through 2007, Sun's managed services achieved significant growth in its customer base, resulting in a 25% revenue growth. The extension of remote management services to its customer base helped Sun reduce its cost structure to deliver operations and support services by removing most premises-based personnel and some break-fix dispatch. Sun's managed services capabilities have improved its customer service quality through proactive threshold monitoring, and improved software and change-management practices.

Consulting and integration services are focused on IT architecture, technical consulting, technical assessments, migration services and IT service management processes. Sun will have difficulty selling its virtualization solutions without strong proprietary or partnered consulting services. Sun continues to lead its traditional competitors in managed services because of its management technology base, and structured process and methodologies. Sun introduced IT infrastructure utility services three years ago in the U.S. as a standard high-performance transaction processing infrastructure computing capacity offered at $1 per CPU hour. Large customers liked the idea, but wanted customization in which Sun modified the standard infrastructure. The majority of the thousands of customers using the public infrastructure utility, which is available in 42 countries, are software developers and educational institutions.

Although database management systems (DBMSs) are not new to Sun, which has supported many DBMS engines for closed and open source over the years, its acquisition of MySQL positions Sun as a serious vendor in the DBMS market. Sun needs to integrate MySQL into its software group, and show increased sales and revenue to become a serious player here.

Through the integration of several acquisitions from 2003 through 2007, Sun has created an identity and access management (IAM) portfolio that provides enterprises with a relatively effective answer to their IAM requirements. Sun Java System Identity Manager and Access Manager products are considered leaders in the IAM market.

Since 2002, Sun has maintained annual spending of at least 14% of its revenue on R&D. The percentage is somewhat lower for the first quarter of 2008 and the second quarter of 2008 (13.9% and 12.8%, respectively), which is closer to industry averages. The above-industry-average levels of investment are a result of Sun's strategy that it must create and own unique intellectual property as the core of its value proposition. Solaris, Java and UltraSPARC are the highest-profile examples of this strategy. Sun's identification of and investment in key technology trends, such as multithreading, multicore and power conservation (well before they became mainstream), is impressive.

For the wealth of products spawned by Java, we rate the underlying technology as "positive." The Java Community Process remains one of the most successful de facto standards efforts in the IT industry.

Sun is a premier contributor of key technologies to the open-source movement. From OpenSolaris to middleware (GlassFish), DBMS (MySQL acquisition) and Java, Sun has delivered innovative code into various communities.

With its Java Composite Application Platform Suite, Sun has one of the most technically elegant suites for service-oriented architecture (SOA). However, in the two years since its acquisition of SeeBeyond, Sun has not regained the preacquisition momentum.

Sun's pricing strategy is well-aligned with its business strategy. It is moving toward greater simplicity and continues to be innovative. Its product and service prices are comparable to competitors; most of its software is available at no cost. Sun has been moving away from a standard licensing model — a case in point being its operating system, Solaris, which is available at no cost and can be run that way indefinitely; however, most enterprise customers see the value in buying a service contract that includes updates and support. Sun's Try and Buy program, plus a program for startup companies, has attracted new customers to the company.

Eighteen months after launching the Sun Partner Advantage program, Sun has used the program enhancements to better leverage the overall partner community, driving approximately 70% of worldwide revenue via indirect sales channels. Although the upper end of its partners ecosystem is delivering a vast majority of that revenue, there are approximately 3,000 reselling partners and 10,000 independent software vendors (ISVs) in the program. Sun’s program spans partners that focus on reselling hardware, software and services, as well as system integrators, ISVs and developers.

Sun is in Year 2 of a three-year plan to upgrade its sales organization and is executing well. It has seasoned senior executives in place in each geography and supporting its major lines of business, as well as top accounts. Sun continues to invest in consultative selling and training, and is closely measuring improvements to the customer experience it delivers, which has shown improvements for the third consecutive year. Its sales force automation system is implemented worldwide. Sun's presales system engineers continue to be a major asset, especially in conjunction with the company's solutions centers.

Developer influence from Sun-led initiatives is second to none in the industry. A large body of ISV developers, open-source developers and hobbyists gain from Sun's support of community development efforts. Java.net, java.sun.com, NetBeans and Java (as evidenced by the popularity of the JavaOne Developer Conference) represent significant efforts that Sun has delivered to developers. In particular, the open-source NetBeans Java integrated development environment (IDE) is firmly established as the second-most-widely-used Java developer IDE in the market (behind Eclipse). Sun has made early investments in emerging technologies, such as Ruby (and the Rails framework), and is helping advance these efforts toward mainstream adoption.

Hardware support: Sun has quietly built an impressive direct-service capability for its equipment, in part by refocusing the resources it acquired in the StorageTek deal.

Software support: Sun offers telephone and online technical support, software updates and upgrades, and self-help tools and notifications. It has always provided multivendor software support, including the Linux operating system, and Java-based Linux and Windows applications. Under its VIP Program, Sun supports products from more than 100 providers. It operates support centers with SAP, Oracle and Symantec, and has joint support agreements with EMC, IBM and others. Sun has four levels of support: basic, standard, premium and premium plus. In line with its corporatewide use of communities, Sun facilitates an Advisory Panel to influence the improvement of support services.

Dedicated account executives are responsible for Sun's top accounts, along with dedicated specialists from each line of business. Dedicated account executives support the next tier of accounts, with support from a team of specialists. Many customers have named service account managers for Sun-supported software. Positive responses to the question “Would you recommend Sun?” have increased, as has satisfaction with Sun Services.