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THE DAY AHEAD: Sun sets platform for future growth

COMMENTARY -- Amid the launch of new workstations and software, a new chip and a new catch phrase, Sun Microsystems (Nasdaq: SUNW) set the stage for its future growth. Sun also hinted that its current quarter ending Sept. 30 is on track.

Of course, it wasn't easy to spot the financial news Wednesday. Sun's New York City product launch featured a race car, a spoof of the "Survivor" TV show, a few glitches and plenty of jabs at Hewlett-Packard (NYSE: HWP), which competes with Sun in the Unix workstation space.

Before we get into the long-term view, let's cover Sun's first quarter. Sun execs didn't say much since they are in their quiet period, but Chief Operating Officer Ed Zander told financial analysts that there was no need to change the company's guidance from August. In August, Sun told analysts demand was strong. In this case, no news is good news from Sun. According to earnings tracking firm First Call Corp., Sun is expected to report first quarter earnings of 25 cents a share.

As for those pesky questions about Europe, Zander said the value of the Euro is disconcerting, but it's something companies just have to manage around. Europe accounted for 27 percent of Sun's sales in fiscal 2000.

The next five years

Every five years or so, Sun reinvents itself and coins a new phrase. In 1990, Sun said the "Network is the Computer." In 1995, Sun wanted to "Dot-com the World." Yesterday, Sun was all about the "Net Effect."

Officials also were sure to note that the Net Effect slogan is more than a marketing pitch. One exec told analysts that "this isn't BS."

The Net Effect strategy is designed to make Sun's hardware, software and technology an integral part of the network. If all goes well, Sun's hardware sales will track the growth of bandwidth -- picture the hockey stick graph. Sun's new pitch is about scalable architecture and marshaling resources across the network.

The lynchpin of this Net Effect strategy is Sun's UltraSPARC III processor, which will power Sun's new line of workstations including the just announced Sun Blade 1000 and Sun Fire 280R. Those two workstations play in the low end of the market. The next six to nine months will feature products for the high end. Sun also unveiled enhancements to its Solaris 8 operating system and other network software.

It's worth noting that the UltraSPARC III is 18 months behind schedule, but that's more fodder for gear-heads than investors. The UltraSPARC II is still selling well and boosting Sun's sales by eye-popping percentages.

The revenue stream

If Sun can grow sales with arguably long-in-the-tooth products, imagine what it can do with the new stuff.

For perspective, Sun's year-over-year revenue growth has accelerated in each of the last four quarters, including 25 percent in the first quarter, 27 percent in the second, 35 percent in the third and 42 percent in the fourth quarter reported in July.

Sun execs made things clear for analysts -- odd number versions of the UltraSPARC chip signal a new pipeline of products/potential revenue. The UltraSPARC kicked off a sales surge and the second version was an upgrade. The UltraSPARC III chip and the workstations it powers signal a new revenue stream for Sun.

The UltraSPARC IV will advance the third version, but the UltraSPARC V, which should arrive in 2003, will take the revenue baton from there. The new road map for UltraSPARC V was behind previous projections, but officials noted it was conservative. Zander said he "felt good about our chances" of meeting the timeline. He should -- there are 200 engineers working on the UltraSPARC V.

The workstations announced Wednesday will be ready to ship in volume for October, November and December, but Sun isn't expecting a stampede. Customers' upgrade cycles are varied -- with some customers adopting Sun's latest products quickly and others content with the current versions. This Net Effect upgrade cycle is a multi-year thing not an overnight jump, said officials.

"We're setting records with our current products," said Zander. "Something changed in the buying cycle. It's more than just buying a bunch of boxes. Customers are buying architecture."

Cobalt buy

Zander said Sun's recent acquisition of Cobalt Networks (Nasdaq: COBT) was "not a Linux play, but more of an appliance play." Some analysts don't agree. SoundViewWit Capital analyst Mark Specker said in a recent research note that Sun's Cobalt purchase suggests the company "believes a chunk of its served market may shift away from its very profitable high-capacity Unix servers."

"Sun Microsystems has been 'multi-handed' about Linux, both offering to 'love it to death' and suggesting that 'we already have the best Unix in the world,'" said Specker.

3Com correction

In my column yesterday, I said I was "amused" that 3Com CEO Eric Benhamou just got around to installing a home network. I goofed and misinterpreted what he said.

A number of 3Com employees set me straight. Benhamou has had a home network for at least six years. "At the time it consisted of an enterprise router and 10BT. Nowadays he is using our new HPNA gear and AirConnect - a lot slicker," one reader informed me via email. TDAIN
• Sun unveils next-generation UltraSPARC
• Sun snaps up Cobalt for $2B
•  Sun leaps over 4Q estimates, sets 2001 growth targets
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