甲骨文 (ORCL) 2009 Q2 法說會逐字稿

Good afternoon.

At this time, I would like to welcome everyone to the Sun Microsystems fiscal 2009 conference call.

(Operator Instructions).

Thank you, ladies and gentlemen.

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

Ron Pasek, Vice President and Corporate Treasurer for Sun Microsystems.

Good afternoon, everyone, and welcome to our quarterly conference call.

Joining me to discuss our Q2 results is our CEO, Jonathan Schwartz, and our CFO, Mike Lehman.

Earlier today we posted a copy of the operations analysis data sheet with nine quarters of financial and operations information.

We have also posted our Q2 '09 earnings call financial slides which accompany our prepared remarks.

All of this data may be viewed at sun.com/investors.

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

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

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

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

We do not currently intend to update these forward-looking statements except as required by law.

In addition, we will describe certain non-GAAP financial measures.

These should be considered in addition to and not in lieu of comparable GAAP financial measures.

Please refer to the earnings call financial slides on page 15 which shows our reconciliation from GAAP to non-GAAP net income.

With that said, let's turn to our results for Q2 fiscal 2009.

Sun's total revenues for Q2 were $3.220 billion, a decrease of 10.9% year-over-year.

This compares with $3.615 billion in revenue last year.

Total gross margin as a percent of revenue was 41.9%, an increase of 1.7 points sequentially.

Total R&D and SG&A expenses were $1.327 billion, a decrease of $131 million year-over-year.

The income tax provision for the quarter was $17 million.

GAAP net loss was $209 million or a loss per share of $0.28.

This compares with GAAP net income of $260 million or earnings per share of $0.31 in Q2 fiscal 2008.

The Q2 '09 GAAP net loss of $209 million includes a restructuring charge of $222 million.

Non-GAAP net income was $114 million, or earnings per share of $0.15.

This compares with non-GAAP net income for the same quarter in 2008 of $409 million or earnings per share of $0.50.

Now let's take a look at revenues by category for Q2 fiscal 2009.

Total products revenues were $1.939 billion, a decrease of 13.8% year-over-year.

Computer systems revenues were $1.369 billion, a decrease of 14.1% year-over-year.

Storage revenues were $570 million, a decrease of 13% year-over-year.

Total services revenues were $1.281 billion a decrease of 6.2% year-over-year.

Support services revenues were $946 million, a decrease of 9.1% year-over-year.

Professional and educational services revenues were $335 million, an increase of 3.1% year-over-year.

We ended the quarter with a cash and marketable debt securities balance of slightly over $3 billion and generated positive cash flow from operations of $36 million, the vast majority of which is attributed to the foreign exchange impact on cash.

We did not repurchase stock in Q2 and we still have $906 million remaining in the $1 billion share repurchase program announced in Q4 2008.

At this point, let me turn it over to Jonathan.

Great.

Thanks, Ron.

And thank you all for joining us this afternoon.

I'll start with some prospective on our Q2 results in the current climate, then followup with commentary on our products disclosure, which you can see on slide 6 and 7 in the slide deck, then I'll turn it over to Mike for comments on the our financial metrics and an update on the restructuring plan we announced back in November.

Overall, results for Q2 were in line with what we expected as macro worries factored in to customer discussions across all geographies.

These concerns resulted in decisions related to higher end system purchases being pushed out so billings were down year-over-year for SPARC enterprise servers alongside the storage and service businesses attached to them, continuing a trend that began about a year ago.

Now with that said, growth in our key areas continued with software high point and our Open Storage CMT, or Niagara, along with X86 business systems all delivering double-digit growth.

As we shared with you last quarter, Sun's business can be viewed in two categories, tradition and growth, depicted on slide 7.

Growth categories now account for over one-third of Sun's product billings up from just 23% a year ago and are continuing to open new opportunities within our existing installed base and, more importantly, far beyond it.

On the traditional front, declines in enterprise SPARC systems are by in large the result of purchase delays and with mission critical systems platforms continuing to age, this business represents significant future upgrade and refresh opportunities, but we were disappointed with the results and the related affect it had on our storage and attached service offerings.

Our tape and archive business outperformed the competition, albeit in a declining market, but also represents an attractive base of annuity opportunities going forward.

Now on to the growth businesses.

Software was a shining light in Q2 as total software billings grew 21% year-over-year and 52% sequentially.

Java software billings grew 47% year-over-year as we continue to monetize our distribution power to world's client devices from personal computers to set-top boxes and mobile handsets, and as we began delivery of our new platform, Java FX to OEMs across the world.

As mobile devices and consumer network connected consumer devices continue to heat up, we believe the Java platform running in front of now billions of consumers represents an increasingly attractive business.

MySQL and infrastructure software billings grew 55% year-over-year on the surge in demand for Open Source middle wear from identity management and data base management to integration software.

In the midst of this economic downturn, discussions related to free and Open Source software has substantially heated up.

This is no longer a peripheral discussion with CIO's.

Cost reduction related to open source adoption has become a focal point for decision -makers across the world.

Solaris management and virtualization billings grew sequentially but not year-over-year as customers migrated to subscriptions and service offerings and away from more traditional licensing.

We believe this transition has largely been completed in Q2 and again positions the Solaris and Open Solaris platforms as one of three surviving operating systems for Cloud computing, alongside Microsoft Windows and Linux.

As a result of our assets from Java and Open Solaris to MySQL and XVM, Sun is positioned to be the provider of the world's most complete Open Source software platform for enterprise computing and, more importantly, for the Cloud.

Now on to the systems side of our business.

Billings for our Solaris-based chip multi-threading systems, also known as CMT or Niagara platforms, increased 30% year-over-year in Q2.

Based on Q1 and Q2 FY '09 billings, CMT have become a $1.4 billion plus annual business for Sun growing at significant double digits and with IBM's power and HP's [Itanium] available in only high-end configurations, our Niagara platforms stand alone as volume alternatives to customers running IBM's, IAX and HP's HPUX.

We continue to broaden our Niagara offerings most recently with the addition of the T5440, a powerful mid range computer fueled by the growing base of volume Niagara units in both blade and rack form complementing our X86 platform offerings.

Speaking of which, Sun's family of Intel and AMD based X64 servers increased 11% year-over-year in Q2 billings.

Blades, which include SPARC, Intel and AMD processor base systems delivered another outstanding quarter growing billing 62% year-over-year.

We believe this performance reflects market share conditions across blade servers, building a footprint that allows for higher margin software service and storage offerings.

To that end, billings for open storage products grew 21% year-over-year which reflected in part a transition to Sun's flash based 7,000 family, also known as Amber Road, around which we are seeing tremendous customer and partner interest.

Based on industry standard components and the popular Open Source ZFS File System, these platforms deliver massive price performance benefits against proprietary [Naz] vendors.

With more than 2,000 channel partners now trained and certified to sell Amber Road and with customer buzz among the highest we've seen for a new storage product, we have high expectations going forward.

This is the first of what will be a complete line of Open Storage based products covering the smallest customers all the way up to main frame storage.

Amber Road also sets us up to broaden our line of appliances.

Just as the freely distributed ZFS File System creates opportunity and awareness for Sun's Open storage offerings, I believe our newly introduced cross bow networking platform creates similar opportunities for Sun in the networking marketplace.

Like the market for traditional storage, the networking marketplace is characterized by very high prices, proprietary software, restrictive licensing and restrictive hardware, exactly the environment in which Open Source software and commodity components create choice and competition welcome changes for customer seeking budget and technical relief along with a great opportunity for Sun.

To conclude, I'll remind you that tough times create unique opportunity for those with differentiated innovation.

Although we see customers under stress across the world, that pressure is opening their eyes to the alternatives Sun provides across a wide range of ubiquitous software and systems innovations.

Sun can draw upon the most pervasive software brands and ubiquitous development platforms, the broadest user communities and among the most powerful products in distribution assets to drive more aggressive growth in the future.

With that, I'd like to turn it over to Mike for comments on our financial performance.

Thanks, Jonathan.

I will start by commenting on gross margins.

Products gross margin increased sequentially by 4 percentage points.

We experienced a fairly normal level of component cost decreases, and also maintained a disciplined and balanced approach with regard to pricing and discounting.

Basically, the combination of lower component costs, disciplined pricing and discounting and a slightly positive mix are the reasons for the sequential increase in products gross margin.

Our services gross margins decreased about 1.2 points sequentially.

The principal reason for this decrease was an increased mix of professional services revenues which typically carry gross margins in the low to mid 20% range.

From time to time, we choose to accept a few lower margin PS engagements as a way of maintaining customer loyalty and increasing our overall opportunities.

Turning to operating expenses, both R&D and SG&A were down both year-over-year and sequentially.

The year-over-year decrease of approximately 9% is principally due to lower commissions and other incentives as well as some benefit from the restructuring actions announced in May of '08.

The sequential decrease of about 1% is minimal.

As you can see, at the current level of revenues, gross margins and operating expenses, our Q2 GAAP operating loss is $199 million which includes a charge of $222 million for restructuring.

As most of you know, in Q4 '08 we began providing a non-GAAP measure of earnings which excludes a number of cash and non-cash charges.

We have provided the detail of this measurement in our operating analysis for the most recent nine quarters.

Our Q2 non-GAAP EPS was $0.15 which compared to $0.50 in Q2 of the prior year; however, this does represent an improvement of approximately $0.24 versus Q1 of the current fiscal year.

In November we announced a further restructuring for which we incurred a charge of $222 million in Q2.

To remind you, we stated that the total restructuring would result in charges of approximately $500 million to $600 million, and that the vast majority of those charges would be incurred or accrued in Q2 and the second half of this fiscal year.

The restructuring charges are essentially severance and other head count related charges.

The timing of the accruals is based upon our process for identifying the areas impacted and the various notification requirements that differ by country.

We still expect that we will reduce our head count by approximately 5,000 to 6,000 from our Q1 ending head count which was approximately 33,425.

Our head count at the end of Q2 was up nominally to 33,500.

Keep in mind that the notifications associated with the Q2 restructuring accrual will take place in this March quarter.

We still expect that the resulting annual cost reductions will be in the range of $700 million to $800 million once all actions are completed.

Further, we expect that the majority of the benefit of these cost reductions will be achieved beginning in Q1 of fiscal '10.

Turning to the balance sheet, day sales outstanding came in at 72 days and days of supply at 28 days, both of which were slight improvements sequentially.

In addition, the days payable outstanding increased to 62 days.

These improvements contributed to a sequential improvement in our cash conversion cycle of 13 days.

And, as Ron mentioned, operating cash flow for the quarter was $36 million.

At this juncture, consistent with past practice, we are not going to provide any specific guidance with regard to revenues, gross margins or other elements of the business model.

We do expect that the March quarter will be challenging at a minimum due to the normal seasonal revenue decline that we have historically experienced.

We intend to complete the previously announced restructuring and are focused on delivering longer term improvements in operating income, non-GAAP earnings and cash flows.

With that, I will turn it back to Ron.

Thank you, Mike and Jonathan.

Before we begin the question-and-answer session, I would like to request that each of you ask just one question and then re-queue for additional questions.

Kathy, will you please start the question-and-answer session.

(Operator Instructions).

Our first question comes from Bill Shope of Credit Suisse.

Okay.

Great.

Thanks.

Last week IBM made the argument that virtualization and increasing focus on utilization rates is pushing demand towards higher end server systems yet we're seeing the opposite trend in your results.

Can you help us understand why things may be different on your end and how you view the current server industry trend?

You bet.

I think more than anything else customers are looking for value and when they see innovation in the marketplace that gives them that value they'll gravitate toward it quickly.

So we clearly view our industry as one that is driven by the volume effect or kind of the volume on entry level systems eventually allows people to create technical alternatives to more traditional proprietary high-end systems and I think we're progressing very nicely with that strategy.

So the growth we saw on our low end platforms, the growth we saw on our X86 systems reflected by the growth we see, for example, in our MySQL and infrastructure businesses, these are all growth trajectories that are spawning from volume opportunities and, again, when we think of virtualization, we do not think of it simply as a software technology, we view it overall as an opportunity to build systems that deliver fundamentally what people traditionally only got on high end system which was consolidation.

Our CMT platforms, the most recent of which are actually 256 way computers, are fabulous consolidation platforms but at a fraction of the price of more traditional proprietary high end.

Next question, please.

Our next question comes from the Richard Gardner of Citigroup.

Thanks very much.

Jonathan, first of all I was hoping you could give us an update on Solaris attach rates on your X86 server line.

You bet.

That continues to be kind of difficult to lens because obviously customers tend to buy licenses to the platform and then buy systems to run the platform on.

But simultaneously if you look at our open storage lineup, there's 100% attach rate to Solaris on those platforms.

So we continue to see growing interest.

We've had a fair enough of both high performance computing wins and fairly large-scale, both MySQL as well as oracle build outs being done with Solaris on X86 and we have some fairly high profile financial services customers, big web service companies and a fair number of customer references that are just giving us more and more opportunity.

I think as customers leave proprietary units behind, they're moving toward Open Source operating systems and Solaris and Linux are obviously the two that they have to pick from and that represents a big opportunity going forward and not just on X86 but obviously on our CMT Systems as well.

Okay.

And then as a follow-up, sorry, Ron, I was hoping that Mike, you might be able to give us a sense of what the impact in the quarter was on gross margins from the recovery versus the write down that you took last quarter on traditional SPARC servers.

So it's hard to -- it's hard to quantify.

I'm not sure how to respond specifically.

In Q1 we had a higher than level normal of excess and obsolete inventory.

We quantified that back then.

If you're asking did we recover all of that, the answer is no.

We're still evaluating our inventory.

We feel good about our inventory levels in terms of the quantities and the parts, but we still have some amount of excess and obsolete inventory every quarter.

And, again, I apologize for maybe not understanding your question.

We did not get benefit from the write off that we made in Q1, if that was your question.

Actually, yes, that helps.

Thank you.

Thanks, Rich.

Kathy, next question, please.

Our next question comes from Ben Reitzes from Barclays Capital.

Good afternoon.

Could you guys talk about your bookings and deferred revenues.

Some of your bookings on the services side look like the decline is in the 20s and the bookings for products have decelerated as well to negative 16 but your deferred revenues grew.

Which is a better indicator of how you're doing and how should we think of that going into the seasonally weaker March quarter with those two numbers?

So it's Mike Lehman.

Again, the overall book-to-bill is essentially one to one, so that's a good indicator.

Again, we have typically deferred products revenues associated with the high-end and other products that are shipped in the last couple of weeks of the quarter typically because customers do not have time to install them, certify them, signoff on them and in many cases our products are packaged as part of professional services implementations as we've talked about and so the deferred products revenue typically represents products that were shipped in the last month of a quarter and the vast majority of those I would say 75% to 80% were turn into revenue in the succeeding quarter.

In services, again it's typically most of our contracts are annual, some are slightly longer than that so the services deferred revenues get recognized over the next year.

So there really wasn't anything that unusual in the pattern.

Again, overall book-to-bill of essentially one to one and the increase in deferred products revenues really just reflects the timing and somewhat back-end loaded nature of the quarter.

So it's making it look like a normal seasonality in terms of 1Q or would that be guidance?

It would probably be guidance and what I was trying to say is I wanted to remind people which you obviously caught that we always have had a seasonal decline in the March quarter versus the December quarter.

We would certainly be remiss if we didn't expect that and it's hard to predict too much more at this point, Ben.

Thank you.

Thanks, Ben.

Kathy, next question, please.

Our next question comes from Maynard Um of UBS.

Maybe a broader question in terms of the overall industry.

In your discussions with customers, can you just talk about what customers are telling you relative to what they anticipate spending would be -- would look like either for the full year in 2009?

Thanks.

You bet.

So it obviously depends upon the customer.

I'll give you a great example of a recent conversation.

I was with a very large financial institution that is, as we speak, consolidating an enormous breath of retail accounts through their website right now and, again, they're managing hundreds of millions of accounts through the web.

Simultaneously, they're running video surveillance in all their bank branches and while that's going on they're also doing some very high end, back end consolidation work and what the CIO reflected to me was they were probably going to put the big ERP consolidation activities on hold, kind of big lumpy but relatively discretionary purchases but, in the interim, it's not as though just because the economy went down that they'll be turning off video surveillance.

If anything, they need to keep bulking up their storage and they're looking for more economic ways to go achieve that, and simultaneously they're trying to deal with the onslaught of traffic now coming in through their websites as they're interacting with users who are kind of frequently checking in on account balances and trying to manage their finances.

So that's kind of a general reflection of the marketplace where customers find revenue opportunity and alignment and efficiency they're going to go after it aggressively, especially our customers who tend to see technology as a competitive weapon more than simply as a cost.

But on some of the larger and lumpier purchases, they might putting those on hold, specifically those that tend to be at the very high end with single large purchases.

So, again, if you're talking to social media companies, they're booming right now.

The inauguration was a great example of more people watched it online than watched it on TV and that had a great affect on our business with some of our media customers.

So we do not see any cessation in demand or any view away from IT as a means of building business and creating opportunity, but certainly for some of the larger decisions that might be more discretionary in the near term, we're seeing some of those put off.

Thanks, Maynard.

Kathy, next question, please.

Shannon Cross from Cross Research.

You may ask your question.

Thank you.

Good afternoon.

My question, Mike, is basically looking at currency since it's been such a swing factor for so many companies, can you just kind of walk us through where the puts and takes are on your P&L and your balance sheet and how your able to hedge and then how we should think about currency movements with regards to bookings and billings and that as well.

Thank you.

So that's a -- frankly a very long conversation, the impact on every line item on the P&L.

At the highest level, as most of you know, we do a minimal amount of hedging of a few of our net currency exposures.

That has an impact which mitigates the net income swings.

We can still see swings on individual line items.

It's most pronounced in the services revenues areas, if you will.

And, as Ron mentioned, it even shows up in translating the non-US P&L dollar denominated cash.

So it's kind of a long topic.

We probably better take it off online.

It's still fair to say that the net impact on the overall income statement in the quarter is relatively minimal as it has been for a number of quarters and that's about as much as we can go into in a one-minute answer.

Okay.

Thanks.

We're happy to follow-up with you offline.

Thanks.

Thanks, Shannon.

Next question, please.

Toni Sacconaghi.

Sanford Bernstein.

Yes.

Thank you.

Can you comment on support services which were down about 9% year-over-year and I think that was the lowest that Sun has ever seen.

How do we think about that as being something that happened just this quarter or perhaps is reflective of some of the weaknesses that we've seen in the high end over the last several quarters.

And then related to that, how do we think about services deferred revenues going down a couple hundred million, I think unprecedented in the history of Sun?

So the principal relationship Jonathan talked about earlier, Toni, is that the principal services revenues do relate to the systems that are sold, so there is a pretty healthy relationship to the decline in the high-end systems, those are typically higher valued contracts as well.

And frankly our attach rate is highest at the high-end of the product line.

So there is a relationship there.

Ron is pointing out to me that while we hedge our net currency exposures, we do not hedge specific revenue line items.

So services revenues also show the impact and I mentioned that quickly of the change in currency movements, that's where we see it most pronounced on an individual line item base.

With regard to deferred revenues, not really much of a story there.

We have a bit of a backlog of service contracts that we weren't able to record.

It's not a huge number, but that certainly would have been reflected in bookings and deferred revenues.

So, again, it's not a big deal.

We continue to work on implementing our financial systems.

I've talked about that for quite a while.

So we have a bit of an unrecorded bookings and deferred revenue services simply because we couldn't process the transactions, not material, not huge, but when you add it all up, Toni, the principal impacts are the ones I cited which are the higher attach rate and the higher value of services contract associated with enterprise servers and the fact there was an impact from currency year-over-year in that line, sir.

The other thing to think about is basically our service attaches to where ever our software is running.

Customers sign service agreements so they get the next upgrade or next update, so our Open Storage product line, for example, should have reasonably high if not very high service attach rates, our libraries, our larger scale systems, our blade platforms, so we think there is actually a fair amount of opportunity to go after more of that service revenue stream and we really do not look at this quarter as indicative of much of anything other than kind of a reflection of the quarter and where we are in terms of some of the businesses.

Thanks, Tony.

Next question, please.

Mark Moskowitz from J.P.

Morgan, you may ask your question.

Thank you.

Good afternoon.

Jonathan, can you talk a little bit more about Amber Road?

You seem to be pretty optimistic about the penetration rates in the early days here.

Maybe you could talk just a little bit about where you're seeing the penetration.

Are these for departmental level, back office, front office, what type of applications should we think about enjoying the early stage wins here?

You bet.

So actually just did a pipeline review with the team this morning and suffice it to say, the opportunities span every industry, every geography, every scale of Company, every operating platform so we're seeing just a pervasive opportunity to go deliver innovation into a marketplace that's really been characterized by fairly rigid vendors and very high in proprietary pricing regimes.

So in essence, just for those who are unfamiliar with what Amber Road is, it takes an Open Source file system, called ZFS which is, at this point, probably the most popular Open Source file system out there, and alongside some innovations with flash memory allows you to accomplish in terms of storage economics for comparable capacity a fraction of the power envelope, a fraction of the purchase price and a fraction of the maintenance cost in markets that are well beyond Sun's install base.

The comment I made about seeing opportunities outside of our installed base, this is a storage device we can attach to a window server, to an oracle, to an HP server, a Dell server, a Sun server, it really allows us to kind of expand the planet and the customers we're talking to, your employer among them, are just giving us tremendous feedback and from what we see, a tremendous pipeline.

I haven't seen in my career at Sun an opportunity kind of blossom as quickly as this one has and it is partly a reflection of where we're headed strategically.

We've done a good job in the past two years selling the seeds of Amber Road by popularizing ZFS through free distribution in Open Solaris.

We can now go back to those same customers and leveraging that same technology build appliances that are very high gross margin, very high value and ultimately quite differentiated.

And as I pointed out in my comments as well, that strategy is exactly what we are now stepping and repeating.

So there is a -- I would argue one of the most important innovations Sun delivered into the technology community in the past 60 to 90 days has been the release of something called Cross Bow.

Cross Bow is a basic technology that allows us to build high performance routers with commodity components and, again, as you might assume that's also a market characterized by proprietary vendors who do not really want to use commodity components or at least do not want to price to their customers as if they do and we think that represents ample up side for Sun.

Thank you.

Thanks, Mark.

Next question, please.

Our next question comes from the Katie Huberty of Morgan Stanley.

Thanks.

Good afternoon.

Mike, in light of the net use of cash in the December quarter and some of the remaining cash sitting overseas, do you feel that you can fund the debt maturity and the restructuring outlays over the next year or might we see you restructure the debt?

So the short answer is we are very comfortable and confident that we can fund the debt maturity and the cash payments.

As we mentioned, we did have a modest amount of operating cash flow but we did have net CapEx obviously, so free cash flow was negative.

But having said that, we have our eyes on what the CapEx is in the next couple of quarter and what our opportunities are, so we feel confident that we have the financial ability to handle the debt maturities and we will look at that and make that decision as we get closer to that debt maturity, which is in August.

Thanks, Katy.

Operator, next question, please.

Dave Bailey, Goldman Sachs.

You may ask your question.

Thank you.

Could you give a little bit more detail around your geographic performance?

It seems like you saw a sharp slow down in Asia-Pacific and the emerging markets.

Yes.

It's Mike.

I'll give a quick cut.

In Asia-Pacific, keep in mind with the reorganization of that territories that principally consists of Japan, Korea, Australia, New Zealand and the [Oseon] area, it's principally reductions in Japan and Korea.

If you follow currency, you saw that Korean currency devalued significantly versus the dollar.

There were some other issues just in the Korean operating environment that we do not think were unique to Sun.

So Korea had a pretty tough quarter.

Japan was down again and so it's the combination of those that caused the Asia-Pac region to be more noticeably down.

And frankly, as Jonathan mentioned, this economic slow down is affecting everybody, even hitting into the emerging markets and you saw that there as well.

And we were roughly flat in emerging markets which was obviously a deceleration and I think folks are just trying to get a handle on the situation, but we're not worried about long-term the role that IT will play in those developing economies.

Thank you.

Thanks, David.

Next question, please.

Our next question comes from Scott Craig of Banc of America.

Thanks, good afternoon.

Hey, Jonathan, in the tape business you mentioned you had gained some share even though it was down on a year-over-year basis.

Just looking at the numbers for the IBM that's the first quarter that happened in a while.

Was there any competitive dynamics to change there or product dynamics from your standpoint that drove a share gain?

Yes.

We think our latest release is giving us the opportunity to talk to IBM customers that haven't had much of an option and I think in general the new innovations we had both from a performance perspective and quality perspective we're seeing more of those opportunities open up across the world.

I think frankly it helps to be in the storage dialogue with so strong a message around open storage.

I think simultaneously, out of the more traditional definition of the tape market, for the most part when you say tape most people envision insurance companies that are going to keep actuarial data for a couple decades, but we're talking to [GENOMX] companies, social networking companies who are aggregating pedabytes of photos, we're talking about folks who do weather forecasting or seismic simulation, all of those are creating just pedabytes and pedabytes of data which end up being more economic on tape than they do on spinning media.

So I would argue one of the strongest product lines in the storage industry right now, and it spans everything from the lowest end kind of commodity storage on the Open Storage side all the way up to the strongest archive solutions in the industry.

Okay.

Thanks.

(Operator Instructions).

Richard Gardner of Citigroup, you may ask your question.

Thanks for taking the follow-up.

I was just hoping that maybe you could talk a little bit about your win rate on traditional SPARC servers outside of your installed base.

I know that you said that you think most of the negative impact there is related to just deferrals of large projects given the overall macroenvironment, but to really feel like you're maintaining share of new projects or is most of what you're selling going into the installed base?

Thank you.

So it's on a dollar basis, obviously our revenue streams will be dominated by the customers to whom we've already sold products as they scale up and scale out their platforms.

But in terms of our ability to attract new customers, Niagara systems have turned out to be a pretty reasonable technology for customers who are bound by energy requirements or application performance.

So we've certainly been able to get out of the install base with Niagara platforms.

It's obviously a lot easier given the presupposition with Niagara that you're going to run Solaris or Linus, that obviously limits somewhat the market opportunity out there.

With our Open Storage platforms, as I pointed out earlier, we can attach to any customer in any environment in any scale.

So we're going to continue investing to go acquire new opportunities as we create the install base with our software platforms into which we then sell commercial products both commercial software as well as commercial systems and the larger the Solaris community grows the more attractive the Niagara product line becomes and our open Solaris platform just continues to grow and its fed not just because we're pushing but because of innovations like ZFS and Cross Bow that capture the attention of administrators and technologists around the world to whom we can then talk about the other related innovations, whether they're MySQL optimized systems or Amber Road storage or Niagara.

Okay.

Thanks, Jonathan.

Thanks, Rich.

Operator, next question, please.

Bill Fearnley of Ftn Midwest.

You may ask your question.

Yes, thanks.

Looking at the demand environment, when you guys look at your pipeline it is measured by outstanding quotes and proposals both direct and in the channel.

What is your view here on visibility here for the next couple of quarters directionally?

What are the gives and takes and what is -- what has it turned into versus your expectations of a few months ago when you look at the pipelines, and then I have a follow-up?

So without commenting on guidance, which I think is what you're asking for.

No I'm actually asking directionally?

Is it better, is it worse?

Right.

I think that's guidance.

But it again really depends on customer and innovation because right now, as I pointed out, some of the social media companies, especially those that have news sites, for example, that are trying to give you an update on where President Obama is headed, they're some of our most aggressive customers right now because they're just being saturated with traffic and we've got a very healthy pipeline with them.

Some of our larger financial institution customers, some of the employers of folks on the phone here are definitely putting off some of the larger scale ERP platforms and consolidation activities.

So it really depends on the customer.

We just had a partner conference recently.

We brought together about 150 of our largest partners from around the world and the variation in the folks in the room was extreme from folks who are growing 100% year-over-year to folks who haven't seen purchase orders in 60 days.

So I'm not sure we have any way of lensing the market more effectively than the rest of the industry or, for that matter, the governments we talk to.

I think what we're seeing universally is a very rapid and continued uptake of Open Source software and commodity components as a vehicle to get better price performance and economic performance out of infrastructure people invest in.

So I think the performance of the software business this past quarter was very encouraging to us.

We are again seeing great growth in opportunity around MySQL and our Open Source operating system and middle wear platforms.

I see no reason why the adoption of those platforms will slow at all in the next year and in some sense they're amplified by the anxiety in the marketplace and that again creates footprint opportunities for Sun and opportunities to sell our innovations.

And then also if I could ask a follow-up, Jonathan, on the partner conference any concerns or did you hear any concerns from the bar or the channel here or any of your partners on credit issues or their accessibility to credit?

I guess I was more focused on talking about what they wanted to talk about, which wasn't credit, it was how many trial units of Amber Road platforms could they get and in what time frame.

So I think credit issues are obviously affecting our customers around the world as much as they are any of our partners.

But I think for the most part they're all looking at ways to save money and financing is one discussion but obviously innovation is where we're more focused.

Thanks.

Thanks, Bill.

Next question, please.

Keith Bachman of Bank of Montreal, you may ask your question.

Hi, Mike.

This is for you.

I just want to understand of the cost savings that you outlined, how much do you think about between COGS and OpEx and, separately, how do you think about potentially using that cost savings to offset ASP's versus dropping to the bottom line?

Thanks.

Yes, so we have not gotten to the point where we want to break out the impact of OpEx versus COGS.

Clearly there is going to be more impact and it will be more noticeable in OpEx than it is in COGS, but certainly some meaningful portion of the cost savings will show up in the cost of sales or cost of service, but we're not ready to quantify it at this point.

And as you can see from our results in Q2, we are focused on taking some of those cost savings and bringing them back to the bottom line as opposed to having them all go out the door in the forms of pricing and discounting.

It's clear from the choices we made in Q2 that we're not just chasing any business out there, we want there to be profitable business, good business, long-term business.

So, and as we mentioned when we talked about the initial restructuring, part of the intention of that is to lower our cost base so that we can generate more return to shareholders cash and GAAP and all kinds.

And just on the overall economics for Sun, just to understand how we view the marketplace and some of the discontinuity and the coverage of Sun, we're not particularly focused on products that are undifferentiated against our peers so some of our peers that are simply remarketing a third party microprocessor end up in kind of tough situations where they're bidding against three other people who have exactly the same product.

We tend to build differentiation into the products and that means that the value we deliver to the customer in the form of our intellectual property through systems engineering and software engineering gives us more of a buffer and, therefore, gives us the capacity to build a gross margin profile that is a lot more attractive than some of the remarketers.

So obviously I think we are executed well in Q2 down that path and we're investing from the R&D perspective as well as how we bring our products to market to ensure we build a more attractive gross margin going forward and over all a more attractive business model.

Okay.

Can I ask a follow-up, question, Jonathan?

Sure.

Just you mentioned Amber Road quite a bit.

How does it differ from Thumper.

Is this the next rev of the Thumper product line?

What Amber Road does that Thumper doesn't do is first and foremost allow you to kind of seamlessly attach to any operating environment, not simply a traditional server environment.

So we're enabling through (inaudible) support the ability to attach to Windows and in essence that opens up a big portion of the marketplace we couldn't get out before.

Secondarily, it adds flash and as a result of adding flash we can get very, very high performance delivery into the marketplace.

Thumper didn't incorporate flash.

And in using ZFS, what we ask the file system to do is to basically move files that are hot or that everybody wants to see, up into flash and that enables you to get extremely high performance.

And that then enables us to use very low performance but very low cost drives as kind of the backing storage, the commodity storage in the background.

The net results along with kind of a killer user interface is we can deliver tremendous performance benefits at the fraction of the cost of some of our peers and competitors in the marketplace using an Open Source software platform that is distributed to millions of licensees around the world.

So this really is the embodiment of strategically what we're attempting to do, create very broad communities around our core software innovations and then sell to them the commercial offerings that they find interesting, both commercial software and commercial systems and storage.

Right.

Thanks very much,.

Thanks, Keith.

Next question, please.

(Operator Instructions).

Our final question comes from Chris Whitmore of Deutsche Bank.

Thank you very much.

Mike, you gave us color sequentially in terms of gross margin drivers.

I was hoping you could do the same on a year-over-year basis.

I'm particularly interested to understand the mix affect on year-over-year and what kind of impact the decline in the SPARC business is having on gross margin year-on-year or maybe put another way, what percentage of your total gross profit dollars do you think is tied to the ultra SPARC business?

Thanks a lot.

Yes, so I do not have all of that data available.

At highest level year-over-year, mix was the biggest impact.

You can look at the billing chart that we gave you and look at year-over-year declines at the enterprise level in the server space and you can see, as we talked about, those carry the highest gross margin that we have, so the principal decrease in products, gross margins year-over-year is the mix.

That's plain and simple what it is.

We had sort of the normal ongoing cost reductions throughout the year of which we, as I said in Q2, did probably a better job of managing the pricing and discounting in relation to that, but it's essentially a mix of the impact year-over-year in products.

And, Jonathan, if I read into your comments a little bit it seems to suggest that you are not anticipating that high end ultra SPARC business to come back any time soon.

Is that a fair characterization of the color or the feedback you're getting from your customers regarding their budgets?

It really depends on the customers.

It depends on a whole variety of scenarios.

We're going to plan the Company prudently and I think you've seen us take actions that presume the macroenvironment doesn't improve.

But it's important to understand about high end systems, when customers make those decisions, they last for about a decade.

So almost independent of the immediate revenue, the install base of business gives you refresh opportunities, service opportunities, attach services and cross selling so that business will tend to be more lumpy.

And just to give you an example of how lumpy it can be, a year ago in this quarter I think the high end business grew 8%.

In Q1 a year ago, it grew 20%.

So there is clearly a very vibrant and attractive business there and even in the macroenvironment, sharing my office with our CFO, I can tell you that most CFO's enjoy saying no.

They have plenty of opportunity to do so in the current environment but only for the PO's that they see, they tend to see the PO's on larger systems, they tend not to see them on low end or capacity based systems and that's, I think, reflected somewhat in what we see in purchase trends in the marketplace.

You can see it in our business.

Our low end business system did very, very well storage as well as systems as well as software for that matter.

The high end is definitely where some of the slowing is occurring and it's for those reasons.

John, can you give us an update on the timing for rock and your upgrade in that segment?

So I think we've said to plan on it later in the year and I think we're still on that.

And the good news is we're building a very large base of customers that understand chip multi threading, which is the family that rock systems will tend to amplify.

So I think the acceptance of multi threading systems now that every single microelectronics vendor I'm aware of is building multi core and multi threading CPU's, clearly we were kind of first into that trend and hopefully we'll be one of the principal beneficiaries.

Thanks a lot.

Thanks, Chris.

Next question, please.

(Operator Instructions).

All right.

Thank you for joining us today.

Investor relations personnel will be back in our offices shortly to respond to any further questions you have.

You may contact us through our investor relations main number at 408-404-8427.

This concludes today's conference call.

We appreciate your participation.

If you joined us late or wish to hear any part of the conference call again, you may call the replay service any time after 3:30 p.m.

Pacific time today to hear a recording of this conference call.

The phone number for the replay is 866-395-1650 or 203-369-0470.

No pass code is required and the replay will be available until midnight on February 4.

Thanks again for taking the time to join the Sun Microsystems call this afternoon.

You may now disconnect.