甲骨文 (ORCL) 2008 Q2 法說會逐字稿

Good afternoon.

My name is Kathy, and I will be your conference facilitator.

At this time, I would like to welcome everyone to Sun Microsystems fiscal year 2008 second quarter results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

(OPERATOR INSTRUCTIONS).

Thank you, ladies and gentlemen.

I would now like to turn the call over to Mr.

Bret Schaefer, Vice President of Investor Relations for Sun Microsystems.

Good afternoon.

Thank you for joining the Sun Microsystems' quarterly conference call.

I'm Bret Schaefer, Sun's Vice President of Investor Relations.

With me today is Jonathan Schwartz, Sun's CEO, and Michael Lehman, Sun's Chief Financial Officer and Executive Vice President of Corporate Resources.

The purpose of today's call is to discuss the results of Sun's fiscal year 2008 second quarter which ended on December 30, 2007.

Herein the last hour we published a copy of the operations analysis data sheet with nine quarters of financial and operations information, including the quarter completed on December 30, 2007.

If you have not received the announcement or the detailed financial data sheet for any reason, or you wish to hear the replay of this conference call you may log onto our website at sun.com/investors.

We posted slides you can view on the web which accompany our prepared remarks.

These slides may be viewed at the same URL, sun.com/investors.

After the prepared remarks of our call today, we will devote the remaining time to Q and A.

During the course of this conference call we'll be making projections and other forward-looking statements regarding expected future financial results and business opportunities.

Our actual future results may be very different from our current expectations.

We encourage you to read the 10-Ks and 10-Qs that we file periodically with the SEC.

These documents contain a discussion of the risks facing our business, including factors that could cause these forward-looking statements not to come true.

We do not currently intend to update these forward-looking statements.

In addition, during the course of the conference call, we may describe certain non-GAAP financial measures which should be considered in addition to and not in lieu of comparable GAAP financial measures.

Please refer to the operations analysis posted on our website at sun.com/investors for the most directly comparable GAAP financial measure and related reconciliation.

We would also like to remind you of Sun's upcoming Analyst Summit in San Francisco February 4th-6th.

Software and hardware financial analysts and portfolio managers are invited to attend by registering at cplan.com/sunanalyst 2008.

Those who cannot attend in person may view and listen in via the internet at sun.com/investors.

Now let's get to the financials.

Sun's total revenues for the second quarter of fiscal 2008 were $3.615 billion, an increase of approximately 1.4% as compared with $3.566 billion in revenue reported in the second quarter for fiscal 2007.

Total gross margin was 48.5% of revenue, an increase of 3.5 percentage points over the gross margin for the second quarter of fiscal year 2007.

Total R&D and SG&A expenses were $1.458 billion, a decrease of $27 million year-over-year.

In the second quarter of fiscal 2008 we recorded a $55 million tax provision.

GAAP net income for the second quarter of fiscal year 2008 was $260 million, or earnings per share of $0.31 as compared with a net income of $133 million or earnings per share of $0.15 for the second quarter of fiscal year 2007.

Q2 products revenues totaled $2.249 billion, a decrease of 0.5% year-over-year.

Within products revenues, computer systems products revenue was $1.594 billion, a decrease of 2.4% year-over-year.

Storage products revenue was $655 million, an increase of 4.6% year-over-year.

Q2 services revenues totaled $1.366 billion, up 4.6% year-over-year.

Within services revenue, support services revenue was $1.041 billion, up 4% year-over-year.

Revenue from professional services and educational services, totaled $325 million, an increase of 6.6% year-over-year.

We ended the quarter with a cash and marketable debt securities balance of $4.677 billion, and generated positive cash flow from operations of $336 million.

During Q2 '08 we repurchased 36.7 million shares of our common stock which equates to approximately $750 million.

Shares were repurchased at an average price of $20.44.

There is currently $800 million remaining of the $3 billion share repurchase program we announced in Q4 '07.

With that I'll turn it over to Jonathan.

Thanks, Bret, and welcome, everyone.

As you heard last week in our preliminary results, we turned in a solid Q2 with a GAAP operating margin above 7% heading into the back half of the year.

We saw a strong demand at the end of the quarter despite uncertainty in the U.S.

economy, and delivered solid bookings growth also a little over 7%.

We expect the momentum to continue as adoption of Solaris and open Solaris grows in emerging companies and emerging economies.

Also as we ramp Linux and Solaris based Niagara 2 offerings and bring our Intel based products on line.

We continue to see competitive strength in our Solaris based enterprise UltraSparc offerings with technical performance and market acceptance above our initial estimates.

As we announced last week, we view the acquisition of MySQL as an accelerant to our growth strategy, amplifying the value of our platforms to our current customers who welcome an open source alternative to proprietary options as well as extending our reach into the far broader lamp community that has yet to meet Sun server, storage, software or services.

At a top level, this acquisition will bring us an enormous breadth of new opportunity.

Now back to organic growth.

We saw double digit growth in India, China, Latin America, Eastern Europe, the Middle East and Africa, where we are now amplifying our investments.

We had several great wins within the quarter and two I'd like to highlight are Cascade, Ltd., one of Asia's largest technical services organizations, selected the Sun Blade 6000 to expand its service offerings; and also notably MTS, or Mobile TeleSystems, the largest mobile phone operator in Russia, selected and deployed Sun's Project Black Box across their service territories, enabling services in locations without Class A data center facilities and giving them a remote operations management capability others were unable to meet.

Traditional CIOs out of space and patience are looking to alternatives and we believe Project Black Box represents the most compelling such alternative supplied by a mainstream vendor.

In terms of product billings in performance in Q2, our Niagara systems truly stood out, growing more than 100% year-over-year to approximately $285 million, with Niagara 2 based systems beginning to ship in December.

Solaris registered licenses reached 11.5 million in Q2, up approximately 65% year-over-year, with over 70% of those licenses reaching the broader hardware market outside of Sun's own offerings.

Our infrastructure software business grew more than 12% year-over-year.

Along with our enterprise servers, inclusive of mid-range and high end platforms which grew 6% year-over-year as the OPL based Sparc enterprise M series continues its strong performance in the data center and our long standing relationship Fujitsu continues to bear fruit.

Disc based storage grew 7% based on strong high end and mid-range array performance and Sun Fire X4500 or Thumper billings were approximately 26 million in Q2.

Other items of note within the quarter, we signed a multi-year OEM agreement with Dell, making the Solaris operating system and support services available directly to their customers.

With IBM and Dell signed this leaves owned one tier 1 vendor without such a relationship.

We debuted the Sparc enterprise T5120, and 5220 servers, the first enterprise servers to use the UltraSparc T2 processor and these doubled the threads of Niagara 1 systems and add in support for floating point and advanced crypto and networking technology.

We unveiled the industry's first open source data center virtualization and management platform at Oracle Open World called Sun's XVM Virtualization Platform along with our management platform XVM OpCenter.

And finally, we received three Info World 2008 Technology of the Year awards, most innovative service, Solaris 10, best storage file system, Solaris VFF, and best storage server, the Sun Fire X4500 or Thumper.

To close, I want to be clear that growth absolutely remains our number one priority and based on our strong product lineup as well as the news of our intent to acquire MySQL, among the fastest growing players in the $15 billion database market, I couldn't be more positive about our prospects and momentum.

The response to the announcement to acquire MySQL has been tremendous.

Every customer I've spoken to in the last week has offered their congratulations and confirmed this gives them the option to deploy MySQL for the first time at the heart of their enterprise.

We are very excited to have MySQL as a part of Sun and we look forward to sharing more perspective on Sun's position and prospects for growth at our upcoming Analyst Day on February 5th in San Francisco.

I would now like to pass it over to my office mate, Mr.

Lehman for more details and specifics on our results.

Thanks, Jonathan.

At the highest level I want to reiterate that our results in Q2 are quite satisfying in that they reflect a great deal of progress towards both our longer term business model and our stated fiscal year '08 financial goals.

Even further, despite a fair amount of economic uncertainty, we have begun to make incremental investments in key geographies where there is near term market opportunity.

This is based on the underlying confidence we have in our products and services and the teams that are bringing those to market.

I would now like to highlight a few additional points about our Q2 results.

The strength of the underlying business can best be understood by looking at bookings and deferred revenues.

As previously mentioned, bookings grew by more than 7% on a year-over-year basis in Q2, and deferred revenues grew by more than 24% on a year-over-year basis.

Product deferred revenues increased by approximately 47% on a year-over-year basis.

Part of the increase in deferred revenues in Q2 reflects the impact of the switch to [sellout] for the U.S.

and Asian channel development partners which was approximately $120 million during the quarter.

Also notable, deferred service revenues increased by more than 16% on a year-over-year basis.

These increases reflect that our customers are purchasing larger, more complex systems, which often require integration and professional services.

These increases also reflect that our customers are purchasing combinations of systems, storage, software and services, which require longer term revenue recognition.

We are pleased with the increases in deferred revenues as these provide a more stable foundation for future periods' revenues.

With regard to Q2 revenues, a couple things are worthy to note.

First of all, it is worth repeating that the switch to [sellout] in the U.S.

and Asia resulted in an approximate 3% reduction in revenues on a year-over-year basis.

When you analyze revenues by geography, keep that in mind.

Our revenues in EMEA grew by 7% on a year-over-year basis.

In Asia-Pacific overall revenues grew by only 2% on a year-over-year basis, however, as in the recent past, that overall growth reflects strong growth in greater China, India, Korea and other geographies, which was offset by continued decreased revenues from Japan.

While we don't report revenues by each of the 16 geographies that we measure, as an example, Q2 year-over-year revenue growth was more than 25% in India, and approximately 15% in both greater China and Korea.

Currency continues to provide a bit of a tail wind, principally to our EMEA based revenues, as the U.S.

dollar continued to weaken versus the Euro.

Generally speaking, our results include some benefit from exchange rate movements in both the revenue and gross margin line items.

As in the past, such benefits are largely offset by the negative impact of such currency movements on our operating expenses, as local currency based expenses are converted to U.S.

dollars.

One further note about channel inventories and the fiscal year '08 switch to [sellout].

As mentioned in our Q1 results conference call, we anticipate completion of the worldwide transition to [sellout] by the end of this fiscal year.

With the Q2 completion of conversion of our Asia-Pacific and our major U.S.

partners, that leaves greater EMEA.

We currently estimate that we will complete the EMEA switch to [sellout] in Q4 and anticipate that the impact to Q4 revenues will be a decrease of approximately $30 million to $40 million--$30 million to $50 million, sorry, in that quarter.

Turning to gross margin, as mentioned by Bret earlier, overall gross margin came in at 48.5%, which was essentially flat from Q1.

From a product margin standpoint, as in Q1, we continued to benefit from both--from component cost reductions.

Such decreases were largely passed on to our customers in the form of price reductions and/or discounts.

And we did not experience any unusual or surprising component cost reductions in the quarter.

In Q2, our product revenues reflected a slightly higher mix of both higher end systems and storage products, which carry slightly higher gross margins and a strong level of Niagara based servers.

Services gross margins continue to benefit from slightly higher volumes and continued cost reductions, which were offset by an increasingly competitive pricing environment for support services, and a slightly higher mix of professional services.

Total R&D and SG&A expenses at approximately $1.458 billion were right in line with our expectations and down about 1% to 2% on a year-over-year basis in Q2.

The total decrease is masked a bit by the impact of currency as noted above.

We have also chosen to make incremental investments in marketing programs and sales and partner coverage in certain geographies where we believe there is near term opportunity.

We remain committed to longer term decreases in annual operating expenses but will also continue to focus on growth as our number one priority.

Our balance sheet remains solid.

As noted earlier, we ended the quarter with approximately $4.7 billion in cash, despite repurchasing approximately $750 million in stock during Q2.

We have approximately $800 million remaining on our board authorized stock repurchase program.

We do not expect the announcement of the MySQL acquisition to affect our plans to continue to repurchase stock.

At the end of each quarter we will update you as to the extent of our activity.

Given how that acquisition has been structured, the cash component of the price represents about two to three quarters of cash flow from operations at our current pace.

In Q1, we began reporting a non-GAAP measure that we entitled adjusted EBITDA.

We believe that it is important to look closely at our company's fundamental value in addition to ways reported under Generally Accepted Accounting Principles.

The principle measure that we use at Sun is adjusted EBITDA, as that measure effectively depicts the cash generating capability of our quarterly results.

During Q2 our adjusted EBITDA was $510 million, an increase of $145 million on a year-over-year basis, and an improvement of $206 million sequentially.

With regard to the acquisition of MySQL we are not certain whether the acquisition will close in either Q3 or Q4 of this fiscal year.

We currently expect to record a one-time charge in the quarter of close of approximately $30 million to $50 million, which will reflect certain accounting adjustments such as the impact of purchased R&D.

We have not finalized our estimates of the impact of the purchase accounting adjustments at this time, as the valuation of the assets being acquired cannot be finalized in a short period.

Excluding the impact of this acquisition, we are essentially reiterating all previous guidance with regard to the current fiscal year.

This guidance includes the following: We expect annual FY '08 revenues to grow at low to mid-single digit rates over the prior year.

Given our first half results, that implies that revenue growth in the second half will be at least 5%.

We expect annual gross margins to be in the range of 45% to 47%.

The low end of this range has increased slightly from prior guidance to reflect the first half year's results.

We expect total R&D and SG&A expenses, given existing currency rates, to be in a range of $5.7 billion to $5.9 billion.

The upper end of this range has increased slightly to reflect first half results and the impact of incremental investments noted above.

We expect operating income on a GAAP basis to be at least 8% in Q4 of fiscal '08.

We expect total stock based compensation to be in a range of $215 million to $240 million for fiscal '08.

We expect amortization of intangibles to be in the range of $250 million to $300 million.

We expect net interest and other income to be in the range of $160 million to $180 million.

This has been lowered to reflect the anticipated acquisition outlays and to reflect the impact of the stock repurchase activity as well.

We expect our fiscal year '08 income tax provision to be in the range of $200 million to $250 million.

Finally, a few words about fiscal year '09 guidance.

As noted above, until we complete the accounting for the MySQL acquisition, we cannot be precise about the ongoing impact to our operating results.

As most of you are aware, ongoing impacts of such an acquisition include amortization of certain intangible assets and the incremental impact of stock based compensation, to name a couple.

We do not currently expect the total impact on our FY '09 income statement to be huge or dramatic, but until we complete the analysis we cannot be too precise.

It is fair to say that other than the accounting impacts of this acquisition, we expect to be on track to achieve annual operating income of at least 10% on a GAAP basis.

Our team sees this acquisition as one of the keys to further top line growth.

We will keep you all up to date with regard to this topic over the coming months.

And with that, I will turn it back to Bret.

Thank you, Mike and Jonathan.

Before we begin the question and answer session, I'd like to request that each of you ask just one question consisting of one part.

This way we hope to get to most of the questions in queue today.

If there's time remaining, we'll be happy to take your follow-up questions.

Operator, will you please start the question and answer session?

Ladies and gentlemen, we will now begin the question and answer portion of today's call.

(OPERATOR INSTRUCTIONS) Please wait a moment for the first question.

We'll take our first question from Ben Reitzes of UBS.

Thank you very much.

With regard to the United States, your revenues decelerated for the second quarter and you had a really good growth in Europe.

Could you just--I think there was a big hit--there was some hit from the inventory, obviously and whatnot but can you just talk about the growth in the United States a little bit more?

You talked about the international economies, it doesn't look like you're seeing anything.

Just a little bit more about what's going on exactly in the U.S.

and how that's going to get better, in addition to channel inventory change and whatnot?

Hey, Ben, this is Jonathan, I'll take a tack at that and then pass it over to Mike.

So within the U.S., bear in mind we took out $120 million or so from the channel, so that was straight off the top line and that obviously gave us pretty satisfactory growth.

We were pleased that we're starting to grow there again, and in terms of the macro picture we see, depending upon the industry, it obviously varies, the financial services companies you see in the press are those that are the most conservative right now about their IT budgets.

On the other hand, that's not the only sector we serve.

We serve communications companies, network service companies, retail companies, many of whom are seeing very sharp growth and frankly are looking toward the kinds of technology that sun builds to get more efficiency, more automation and reach more customers.

So again, notwithstanding the channel changes in the U.S., we had what we viewed as a pretty solid quarter.

And Mike, I don't know if you have anything you want to add to that.

Actually I think that says it very well.

Just to let people on the line know, Jonathan and I are in different locations this time.

So we have to pass it back and forth verbally instead of our usual short handoff by looking at each other, but I'm confident that you've described the U.S.

business well.

Next question, please.

Our next question comes from Andrew Neff of Bear Stearns.

Andrew Neff of Bear Stearns, you may ask your question.

Okay, can you hear me now?

Yes.

Okay.

I just want to go through I guess the chart on the server unit growth and while you've had some pick up in that area, the server units have gone from negative to a positive, still fairly anemic.

Can you go into that in a little more detail, what he what's behind the server units?

Is 2%--how much--you can try and let us understand how much of that is reflected by what you did in terms of the channel.

What would that be like without the channel changes, or just give us a better sense of what's behind those numbers?

I don't have a specific breakdown for you on which units were backed out from the channel.

I will tell you we are seeing a smaller number of more richly configured systems.

Customers are looking to higher scale systems as they move away from hundreds and hundreds of single socket one way servers and end up virtualizing and consolidating onto what are traditionally looked at as symmetric multi-processing machines with multiple sockets of multiple core platforms with large amounts of disc and memory.

So certainly, that was the most significant trends we saw within the quarter.

Andy, this is Bret.

I would say that the trend is a positive one.

I mean, we see that strength in units improving as we do more blade business, as we get further into the Intel architecture business, that trend is going to improve.

Have you thought about--just a follow-up to report on a processor basis, like give us a sense would that give you a processor basis or is it just a box basis?

So we're probably not going to break out the processor basis, because then you're going to start getting into counting cores and counting cores and counting threads and it all just begins to lose the point.

I think the most important point we can make is one we've been making for a long time.

The server business, the storage business, the blade business, even the networking business, they're all converging around highly scaled, highly integrated systems which are best represented to customers in terms of how valuable they are by our gross margin line.

So we obviously want to see an expanding top line but we also want to make sure that we're getting the value that we're putting into the engineering and that's what differentiates the platforms that Sun builds.

Next question, please.

Our next question comes from Richard Gardner of CitiGroup.

Thanks.

Mike, I was hoping you could give us an update on your various different cost reduction initiatives, and in particular, the 1,500 person headcount cut that you announced a quarter ago.

It didn't look like headcount was down a lot, maybe 550 employees in the quarter.

Should we think about that 1,500 being more of a gross number as opposed to a net number, now that you're starting to make investments in incremental growth areas?

In short, the answer is yes.

The other thing to keep in mind is that when the restructuring was announced, we gave sort of a range and that's a headcount number that people centered on but we actually didn't give a specific number.

It's certainly in that range.

That is a gross number versus a net number and as we make some targeted investments in that increased coverage, we will use up some of that.

The other thing to remember, though, is that once an announcement like that is made, often times the headcount reduction doesn't even happen for two to three quarters after that, depending on the geography in which the reduction will take place.

So we are continuing to lower the headcount and you can see there was a net few hundred in the quarter and it will probably continue down a little bit, but as we pointed out and as you recognize, we are going to make certain targeted investments.

Next question, please.

Our next question comes from Kathryn Huberty of Morgan Stanley.

Yes, thanks, good evening.

I just want to go back to the discussion around growth and guidance, because to accelerate to 5% growth in the March quarter would require you to see lower seasonal decline in revenues in a period that is typically tough and layered on top of that a more cautious spending environment.

So if you take the metrics that you see in near term backlog, plus the data points you've picked up thus far in January, are you comfortable, Mike, with the acceleration back to mid-single digit growth in the March quarter or should we think about growth as being even more back end loaded than that?

So I was desperately trying to avoid quarterly guidance, I thought I weaned myself off of that a quarter or two ago.

But it is fair to say that we do expect greater than 5% growth in the second half of the year.

Given that, and again, given the bookings that we saw, the channel inventory reductions that we accomplished in Q2 and the products that are rolling out, it's fair to say that we don't expect all the growth to happen in Q4.

Okay.

Great.

Thanks so much.

Next question, please.

Our next question comes from Bill Shope of JP Morgan.

Okay, great, thanks.

Can you give us an update on sort of how you're looking at your storage strategy going forward?

Obviously you've seen--saw some improvement there this quarter.

In particular, how do you look at the strategy of OEM technology versus your own internal technology, and are you open to new OEM partnerships as you sort of kick start the business while you ramp your--the home grown technology?

And this is Jonathan.

I think we're very happy with the performance of the storage business this quarter, and that's both the performance of the OEM business as well as the more home grown technologies.

I think broadly speaking, we're interested in capturing customers and being able to deliver to them a compelling road map that engages in a life cycle of business with Sun that yields the greatest value to both of us over a long period of time.

I think we certainly looked at--and look at VFS and the core open source file system that I think has been generally recognized as a pretty disruptive innovation in the storage marketplace as giving us a opportunity to have a fundamentally different discussion with customers, which is the same open source revolution that created a window of opportunity for Linux and for the evolution of a very different server architecture is now available to storage customers who might want to pay a lot less but get a lot more performance and lot more flexibility.

So we're interested in building out our product line, we're going to be careful about how we go do it and we're always interested in building new OEM relationships where there's value for both parties.

Okay.

Great.

Thanks.

Next question, please.

Our next question comes from David Bailey of Goldman Sachs.

Great, thank you very much.

Given the gross margin performance that you saw in the first half, can you talk a little bit about what the drivers are behind your targets for the full year, why you're expecting it to come down?

Is it pricing or mix or conservatism?

Mike?

I thought you might pass that one to me.

So there's a mix of all of those.

I would suggest certainly as we talked about, we expect the Intel based systems to be shipping more in volume in the second half of the year.

We just announced some new low end disc products that will be more accepted in the second half of the year.

So part of it is certainly mix.

Part of it is that we don't expect continued component cost decreases at the same rate that we have seen them over the last six months.

So that's partly based upon working with our partners and suppliers and partly a little bit of conservatism.

So, and then I also mentioned that we do expect continued pricing pressure on the support services part of the business and that's factored into our view of the second half of the year.

So it's all three.

Thank you.

Next question, please.

Toni Sacconaghi from Sanford Bernstein, you may ask your question.

Yes, thank you.

At your Analyst Day at the start of the fiscal year, your presentation was entitled 'Accelerating Growth' and you gave the guidance that you would be looking for 3% to 5% revenue growth but I think at the time you appeared optimistic that you could actually do better than that.

If you do the 5% or 6% growth you're going to be at the very low end range of that.

It's also going to be down from the 6% growth you actually did last year.

So going back to the theme of accelerating growth, did something change in the first half of this year relative to your expectations in September, or do you actually think being at the high end of that range or accelerating growth year-over-year is possible?

No, I think we're pretty comfortable with the guidance we gave at the beginning of the year, that we, as the product line flushed out and as the market continued to emerge, that we would be best positioned to get real momentum, not just growth within the quarter but also good leading indicators for what happens next.

So I think nothing's really changed in our view of that plan, and if anything, I think the bookings growth we saw in Q2 gives us even more confidence that we're going to be able to deliver in the back half of the year.

But again, there's a reason that we give a range.

It's because we're not seers of the future, we're going to do our best to go after as much of that market as possible.

Next question, please.

Louis Miscioscia from Cowen & Co., you may ask your question.

Okay, thank you.

If you looked at the different geographies of Europe and Asia-Pacific, obviously the growth numbers that you just delivered are very below IBM and HP which, I guess, had anywhere from five to ten times some of the growth area numbers.

Now, would you say it's mostly the products that you have to give out, what we talked about before, the Intel products, (inaudible) and everything else, or you also talked about more OpEx spending.

Is there something else that you have to do in order to get your growth there an awful lot higher and can you be specific about what you need to do?

Is it hiring salespeople or partners or what could it be?

I'm not quite sure what you're talking about when you reference 10x our growth.

Asia-Pacific grew 2%, and HP's grew 20%, so that's 10 times.

And I think when you're looking under the covers that Mike had pointed out, we saw double-digit growth in India, in China, and again, we saw revenue declines in Japan.

So I think was we're seeing is robusted option of the core platforms that are really at the heart of our business, and that's everything from our core operating systems, to the systems infrastructure, and developer offerings we build around it.

So what we have to do is just continue to execute against the growth we saw in the quarter and again, I think there's more specific dynamics in Japan that may take longer to play out, but I think we're pretty confident in the growth that we see more broadly beyond that and not just there but also throughout South and Central America and Eastern Europe as well.

Next question, please.

(OPERATOR INSTRUCTIONS)

Our next question comes from Bill Fearnley of FTN Midwest.

Yes, thanks.

Jonathan, you had mentioned the high scale system before, but was wondering, could you give any more color on what you're seeing in terms of the dynamics there in terms of transaction size, length of negotiation, or and also, new or existing customer capture, any other details in the high scale systems would be helpful?

Thanks.

You bet.

So probably the single most important dialogue we have with customers in high scale systems is just the popularity of our core operating system, Solaris and the fact that we don't lock them into one hardware architecture and can run that operating system on a diversity of vendor's platforms.

So the appeal of our high scale systems comes as a result of two things.

Number one, the OPL systems we built in concert with Fujitsu are delivering performance that was significantly above our original estimates and we're just winning based on benchmarks, and then secondarily the fact that Solaris is spreading awareness of Sun into non-traditional Sun accounts means we're opening up new customers as well.

So it's a little bit of both.

I think when you're operating at the scale of some of our customers in terms of the types of transactions they run, they care not just about performance today, they care about the road map going forward, and I think at the end of the day that's probably the best selling proposition.

We've got a very strong, very robust micro-electronics road map, around not only Niagara but also Victoria Falls and some of the upcoming enhancements and I think that's ultimately what customers buy.

Are you doing better with new or existing customers?

We're doing well with both.

I mean, we've seen in the last quarter the addition of nearly 1,000 new customers and these are new customers buying Niagara systems, buying our X64 systems and we're, again, focused not just on growing in our installed base, we're growing in lots of installed bases; and doing our best to make sure that we don't trap ourselves by just trying to grow within our current customers within our current products.

Thanks.

Next question, please.

Our next question comes from Keith Bachman of Bank of Montreal.

Hey, guys, thank you.

Jonathan, I was hoping you could touch on--I didn't hear you talk about the current run rate of the Galaxy family or X86.

Could you talk a little bit about what the run rate is and how you think that contributes to the acceleration of growth that you're calling for in the next quarters, specifically is Niagara a bigger deal or Galaxy, a bigger deal?

Just trying to help frame the opportunity.

So we didn't see the growth that we wanted within the quarter on our X64 business and there's a few reasons for that, obviously the Barcelona shipment date is pushing some customers out.

So we saw some softness on A&D the side.

The new Intel systems are just coming into their own now, so w we've got lots and lots of demand and are feeling pretty positive about Q3.

But in general, in terms of the growth that we're seeing, in terms of new customers, as opposed to significant revenue growth, is on Edge systems, people who are building out horizontally scaled platforms and that's certainly where the Niagara systems, which again had a 100% year-over-year growth to about 285 million as well as the X64 systems tend to play.

So I think nothing changed about our expectations.

That's a business that we're brand-new in, and it's now roughly a $1 billion business on the X64 side, and we think there's lots and lots of upside.

We can now go after 100% of the market and not just with a couple products, with a completely built out platform of offerings, for everything from a small business to the largest scale super-computers.

So, Jonathan, as you think about the next couple quarters, you think Niagara is a bigger contributor to growth or the Galaxy side?

I think innovation is the biggest contributor to growth, and I don't mean to avoid the question.

I can't predict at that level of specificity what's going to be growing more rapidly.

On the one hand, Niagara is being built off a bigger base and has a ton of momentum.

On the other hand, on the X64 side, we've got a lot of momentum built up into Q3 and now that we have the product I think we'll be spending a lot of time being busy fulfilling that demand.

So we'll see at the end of the quarter.

Okay, thank you.

Thanks very much.

Any other questions.

Our next question comes from Kathryn Huberty of Morgan Stanley.

Yes, question for Jonathan.

Is there an argument to be made that spending related to things like power efficient systems and virtualization actually accelerates with tighter budgets and I guess more importantly, have you seen either of or both of these initiatives move higher on CIO's wish list in the current environment?

There is no question in my mind that when CIOs are put under pressure, they turn to innovation and change as a vehicle to change their spending, and they tend to look at everything.

I mean, everything that was stable and running along, they didn't actually want to pay attention to.

If your budget gets cut, and then you go back and you look at new investments.

What can I do to try and save money?

Virtualization plays a very strong role in that, as does consolidation, as does more efficient management, and frankly, as does swapping out old systems to get to newer, lower footprint systems.

So we certainly believe that when CIOs come under pressure, they tend to turn toward innovation, they turn toward those that can deliver new innovations to help them achieve a different cost profile, and we're definitely seeing more activity in terms of customers interested in change than we were a year ago.

Now they've got a great motivator for change.

It may not be a positive motivator but there's a lot more motivation there.

Next question, please.

Okay, thank you.

We'll now take our final question from Louis Miscioscia from Cowen and Company.

Wow, got in a second time.

I guess as we look back quite a while ago to let's say the March quarter of 2001, many companies didn't see the tech slow down coming, and I wonder if you could just--Jonathan, can you hear me?

Yes, I can.

Okay.

I wonder that in hindsight, a lot of big tech companies missed it back then, and if you can think back, were there any things that maybe we could have saw to catch it and are there any parallels I guess today that we're seeing as obviously we're all rather concerned about the economy.

I think when we go back and look at our own history, the slowdown that we saw in the 2000 time frame really had its roots in the 1998, 1999 time frame, which is that developers began to move away from our platform, and so on the one hand there was certainly a slowdown in venture investing in the financial services sector and telecommunications certainly had their slowdown; but our single biggest issue in 2001 was we were seriously, strategically mispositioned.

We just didn't have product that customers wanted.

And I think as we look at some of the anxiety around the economy now, we look at both our current product line as well as acquisitions we're making, as well as new investments we're making, we feel very, very confident that our products are at the front of the line in terms of what CIOs are looking at.

So in the event of a slow down, my view is people tend to turn toward technology to get more efficiency, to automate, or to go after more customers; and you all tend to spend your time in the financial services sector which is a little depressing at times, but when you come spend time with some of the core customers that we're engaging, communications companies, social networking companies, energy companies, oil at $100 a barrel pays for an awful lot of high performance computing.

We're just seeing growth everywhere.

The biggest challenge for us is making sure we're in the right place to go after it.

But we certainly have the right products to go deliver growth and again, to the extent that there's some buffeting as a result of the slowdown in one economy or the next, we're not worried about the relevance of our core technology for the network going forward.

Thanks very much.

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