Sun sets 10 percent operating margin goal for FY 09

Sun sets 10 percent operating margin goal for FY 09

Sun will continue to cut costs and seek to grow revenue to reach a 10 percent operating margin goal by 2009, the company said Tuesday.

Sun Microsystems, buoyed by its first profitable quarter in more than a year and a half, wants to generate an operating margin of 10 per cent by its 2009 fiscal year.

Sun executives set the goal, though cautioned that a lot of things have to happen in order to reach it, during a conference with analysts in San Francisco.

Sun CEO, Jonathan Schwartz, said increased adoption of Sun's freely-distributed Solaris operating system, its recently announced partnership with Intel and other strategic moves, would help it grow revenue.

At the same time, Sun CFO, Michael Lehman, said the company would continue to reduce its cost structure using a number of levers, though not employee layoffs.

"Our cost structure is still too high," Lehman said, "but we do not intend to have a big layoff and just lower the numbers."

The company was going to reduce general and administrative expenses and research and development spending, as a per centage of revenue, so that those expenses provided a better return, he said.

For example, Sun is converting its own business software infrastructure to standardise on Oracle's 11i bundle of enterprise resource planning software, including general ledger, payroll and customer relationship management software. The conversion is expected to cost more than $US200 million, Lehman said, but it would save Sun the expense of having to manage 1000 different types of software throughout its company. "We have put a stake in the ground and we are on a journey," Lehman said.

Sun posted net income of $US126 million, or $US0.03 per share, on $US3.566 billion in revenue, in its fiscal 2007 second quarter ended Dec. 31, 2006. It was Sun's first profitable quarter after five successive quarterly losses. Sun recorded an operating margin of 2.9 per cent in the second quarter and forecasts a 4 per cent operating margin in its fourth quarter.

On the revenue side, Schwartz said the company's decision to give away its Solaris operating system and open source its Java software create opportunities for Sun to sell hardware and services to those users. Sun's recently announced deal with Intel to install Intel processors in its servers, while Intel markets Solaris, will also create new sales opportunities.

"We are now fully outfitted to pursue 100 per cent of the market. There is no opportunity that we are precluded from bidding on. There is no customer that we cannot serve," Schwartz said.

Sun's turnaround strategy is finally showing up in its financials, Insight 64 analyst, Nathan Brookwood, said. "You had to take it on faith a year ago."

Sun previously only sold servers and workstations running its Sparc processors. Now because it also used Intel and AMD processors, it could appeal to broader markets, Brookwood said.

"Three years ago if you wanted to buy hardware from Sun, you had to sign up for the Sparc religion. Some people believe in other religions and they didn't want to have to do a religious conversion to buy from Sun," he said.

Sun's operating margin goals seemed conservative to Bear Stearns & Co Sun financial analyst, Andrew Neff. In a research note to investors, Neff, who also attended the conference, said, "Sun has more work to do on costs [but] we believe its outlook can further improve."

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