Sun sets lofty operating margin goal for FY09

Sun Microsystems, buoyed by its first profitable quarter in more than a year and a half, said Tuesday it has a goal of generating an operating margin of 10 percent by its 2009 fiscal year.

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

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

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

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

The company is going to reduce general and administrative expenses and research and development spending as a percentage of revenue so that those expenses provide a better return, he said.

For example, Sun is converting its own business software infrastructure to standardize on Oracle’s 11i bundle of enterprise resource planning software, including general ledger, payroll, and CRM software. The conversion is expected to cost more than $200 million, Lehman said, but it will save Sun the expense of having to manage 1,000 different types of software throughout its company.

“We have put a stake in the ground, and we are on a journey,” Lehman said.

Sun posted net income of $126 million, or $0.03 per share, on $3.566 billion in revenue, in its fiscal 2007 second quarter ended Dec. 31, 2006. It was Sun’s first profitable quarter after five successive quarterly losses. Sun recorded an operating margin of 2.9 percent in the second quarter and forecasts a 4 percent operating margin in its fourth quarter.

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

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

Sun’s turnaround strategy is finally showing up in its financials, said Nathan Brookwood, an industry analyst with Insight 64, a research firm. “You had to take it on faith a year ago.”

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

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

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