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Unix still having its day in Sun

Despite declines elsewhere, Unix is booming at Sun.

The decline of Unix is making Sun Microsystems (SUNW) very rich.

Although the Unix market as a whole has remained flat in a booming year for computing, Sun remains one of the most explosive companies in the industry. The company reported record profits of $762 million on sales of $8.6 billion in the fiscal year ending June 30. More product shipped in the last quarter than any previous quarter while servers sales doubled over the same quarter the year before.

And while even Sun executives admit that a substantial portion of the company's growth comes at the expense of other Unix vendors, most analysts see continued expansion for the company, especially in the server arena.

"The story is in the servers and it very much is the company" said Daniel Kunstler, senior equity analyst at J.P. Morgan Securities. "They saw the softness in the workstation market for some time."

In the coming year, the company will strengthen its case against the NT platform through an expanded product line, increased hiring, and nearly $1 billion in R&D investments, according to Sun's executive team. To hear Sun tell it, they are the only credible alternative to NT and will gain share against the Windows world. "We will see a lot of the Unix, X86 architecture move over to Solaris," said Sun president and CEO Scott McNealy. Recent customer wins include Bosch, British Telecom, and Nomura. This empire-building, however, will likely require Sun to seek out additional capital in the coming fiscal year, he admitted.

One of the first results of this will be the release of new workgroup servers as well as software that will allow users to connect their Sparc/Solaris machines more readily to NT networks.

"Look for workgroup servers in the short term," said McNealy during the company's conference call to discuss fiscal year earnings. "We will challenge them on the workgroup servers. On the midrange, we are ahead of them."

The new servers will be designed for discreet functions, such as acting as a mail server or a server for small databases, said Ed Zander, president of the Sun Microsystems Computer Company, Sun's computer arm. Target customers include enterprise customers with Solaris/Sparc backbone systems who want complementary midrange servers and small to medium-size companies looking for packaged systems. This midrange market has traditionally been dominated by Microsoft (MSFT). The servers, which complement a more limited line of existing servers, will contain as many as four processors. Faster processors, larger cache sizes, and clustering capabilities are also on the road map for Sun products.

In addition, both executives said that Sun will release software in the near future that will allow such servers, as well as other Sparc/Solaris equipment, to connect to Wintel networks.

Midrange workgroup servers will not likely provide Sun with the same profits as their higher-end servers, said analysts. "Traditionally, the smaller the box the lower the margin," said Jay Stevens, Buckingham Research Group. Nonetheless, the midrange is a necessary market for the company to fulfill its mission. "They want to be the full-line Unix provider," he said. Sun, of course, will also be making improvements at the high end to stay ahead of Microsoft, Stevens and others said.

Although McNealy and others claimed their products held the technological high ground, the company faces a challenge in staffing. Simply put, the company needs more sales people and consultants. "We are going to get better field coverage," said McNealy. Resellers will also be recruited to penetrate smaller accounts that cannot be reached by Sun or large, national integrators.

Sun's revenues for the fourth quarter came to $2.5 billion, up 26 percent from the fourth quarter of fiscal 1996. Fourth-quarter earnings per share reached an all-time high of 61 cents, compared with the previous year's earnings per share of 43 cents based on operating income.

For the full 1997 fiscal year, the company posted revenues of $8.6 billion, up over 21 percent compared with $7 billion in the previous year. Earnings per share for fiscal 1997 came to $1.96, compared with $1.33 unadjusted for the year before.