Sun Should Pursue OpenSource Full Blast

Last year when Sun Microsystems (NASDAQ:JAVA) took over MySQL, I asked if it would get into open source applications.

Sun’s Q2 revenues of $3.22 billion were in line with the market’s expectations even though they were down 10.9% over the year. However, EPS of $0.15 per share was significantly lower than last year’s $0.50.

By segment, Products contributed $1.94 billion for the quarter, recording a reduction of 13.8% over the year. Of this, Computer Systems’ revenue fell 14.1% over the year to $1.37 billion while Storage revenue fell 13% to $0.57 billion. Total Services revenue dropped 6.2% over the year to $1.28 billion driven by a 9.1% fall in Support Services revenue. Only the Professional and Educational Services segment registered growth of 3.1% over the year to $0.34 billion.

With companies slashing their technology budgets, Sun, like others, has had to resort to lay-offs and restructuring. They expect a benefit of nearly $700-$800 million per year from these actions in the coming years.

Due to the current economic concerns, Sun’s customers have delayed discussions pertaining to higher-end system purchases, resulting in lower billings for Sun’s SPARC Enterprise servers. These conditions are, however, driving higher growth in the open source platform, where Sun’s Open Storage CMT or Niagara, along with x86 systems businesses, all delivered double-digit growth.

As demand for open source middleware grows across identity management, database management and integration software, demand for Sun’s MySQL and Infrastructure software products grew nearly 55% over the year.

Solaris management and virtualization billings also grew sequentially as customers migrated to subscriptions and service offerings and away from the traditional licensing models. As most CIOs are now looking at cost control measures, open source software will likely continue to be a high-growth area. With Java, Open Solaris, MySQL and XCM, all valuable assets for Sun, the company is positioned to be the provider of a complete open source software platform for enterprise and cloud computing.

Billings for Open Storage products grew 21% over the year, which reflected a transition to the Flash-based 7000 family, known as Amber Road. Sun has more than 2,000 channel partners trained and certified to sell Amber Road and has high expectations for the product as it will be a complete line of Open Storage-based products with a wide target, from the smallest customers up to mainframe storage. After all, building massively scalable datacenters used to be the company’s core competence.

They recently also acquired Q-Layer, a Belgium-based cloud computing vendor to deliver simplified cloud management and instant provisioning of servers, storage, bandwidth and software for private and public cloud computing environments. They could also look at other potential acquisitions in the open source space like Collabnet and SpringSource. In addition, there are probably another hundred companies in the OpenSource applications space, that could offer Sun a strategy to combine their infrastructure portfolio with a promising application portfolio as well. For that, SugarCRM would be a good start for a roll-up strategy.

And I would recommend that Sun gets out of the hardware business altogether. Revenues are declining, and competition is getting more formidable. A full-blast OpenSource infrastructure + applications strategy is a much better bet for Sun. A willing purchaser for Sun’s datacenter business may well be Cisco!

After the results announcement, the stock rose to $4.70 in extended trading. It is currently trading at $8.25 with a market capitalization of $6.14 billion.