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Sun Microsystems Reports Results for the Second Quarter Fiscal Year 2009

Sun Microsystems, Inc. (NASDAQ:JAVA) reported results today for its second quarter of fiscal 2009, which ended December 28, 2008.

Revenues for the second quarter of fiscal 2009 were $3.220 billion, a decrease of 10.9 percent as compared with $3.615 billion for the second quarter of fiscal 2008, and an increase of 7.7 percent as compared with $2.990 billion for the first quarter of fiscal 2009. Total gross margin as a percent of revenues was 41.9, a decrease of 6.6 percentage points as compared with the second quarter of fiscal 2008 and an increase of 1.7 percentage points as compared with the first quarter of fiscal 2009.

Net loss for the second quarter of fiscal 2009 on a GAAP basis was $209 million, or $(0.28) per share on a diluted basis, as compared with a net income of $260 million, or $0.31 per share, for the second quarter of fiscal 2008, and compared with a net loss of $1.677 billion, or $(2.24) per share, for the first quarter of fiscal 2009. GAAP net loss per share includes a restructuring charge of $222 million primarily related to the restructuring announcement of November 2008.

On a non-GAAP basis, net income for the second quarter of fiscal 2009 was $114 million, or $0.15 per share on a diluted basis, as compared with a non-GAAP net income of $409 million, or $0.50 per share, for the second quarter of fiscal 2008, and compared with a non-GAAP net loss of $65 million, or $(0.09) per share, for the first quarter of fiscal 2009. Non-GAAP net income per share excludes purchased in-process research and development, amortization of acquisition-related intangibles, stock-based compensation, restructuring and related impairment of long-lived assets, impairment of goodwill, net gain or loss on equity investments and the tax effect of these non-GAAP adjustments.

Sun ended the quarter with a cash and marketable debt securities balance of $3.008 billion and generated cash flow from operations for the second quarter of fiscal 2009 of $36 million.

"It's great to see customers so aggressively embracing open source software, from SolarisTM to MySQLTM, alongside Sun's new open source storage platforms as a means of radical cost reduction,” said Jonathan Schwartz, CEO of Sun Microsystems.

Second Quarter Highlights

  • Grew billings at double-digit rates year over year in key growth categories, which accounted for more than one-third of total products billings in the second quarter of fiscal 2009 versus 23 percent in the second quarter of fiscal 2008:
    • The category of Solaris-based Chip Multi-Threading systems grew 31 percent year over year, and is now at an approximately $1.4 billion annual run rate, based on first and second quarter fiscal 2009 results.
    • The category of Total Software grew 21 percent year over year, and is now at an approximately $600 million annual run rate, based on first and second quarter fiscal 2009 results.
    • The category of X64 servers grew 11 percent year over year, and is now at an approximately $700 million annual run rate, based on first and second quarter fiscal 2009 results.
    • The category of Open Storage grew 21 percent year over year, and is now at an approximately $100 million annual run rate, based on first and second quarter fiscal 2009 results.
  • Increased products gross margin 4 percentage points sequentially, primarily due to lower component costs, disciplined pricing and discounting, and a slightly positive mix impact.
  • Launched the flash-based, Sun Storage 7000 family (Amber Road) in November 2008, built upon the popular ZFSTM file system. Download ZFS here: www.solaris.com/get.
  • Announced a restructuring initiative in November 2008 that is expected to reduce total costs by $700-800 million annually; most of this benefit is expected to be realized in fiscal 2010.

Sun will host a conference call today to review the complete financial results beginning at 1:30 p.m. PT / 4:30 p.m. ET. The general public can access the financial results and listen to the call via Sun's Investor Relations website at www.sun.com/investors.

Safe Harbor

This press release contains forward-looking statements regarding the future results and performance of Sun Microsystems, Inc., including statements regarding customer acceptance of Sun's open source software and expected cost reductions from Sun's restructuring initiative and the timing thereof. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those predicted in any such forward-looking statements. Factors that could cause Sun's actual results to differ materially from those contained in such forward-looking statements include: Sun's ability to implement the workforce reductions in various geographies; possible changes in the size and components of the expected costs and charges associated with the restructuring initiative; competition; pricing pressures; the complexity of Sun's products and the importance of rapidly and successfully developing and introducing new products; Sun's dependence on significant customers, specific industries and geographies; delays in product development or customer acceptance and implementation of new products and technologies; Sun's ability to implement a new enterprise resource planning system; a material acquisition, restructuring or other event that results in significant charges; failure to successfully integrate acquired companies; reliance on single-source suppliers; risks associated with Sun's ability to purchase a sufficient amount of components to meet demand; inventory risks; risks associated with the quality of Sun's products; risks associated with international customers and operations; Sun's dependence on channel partners; failure to retain key employees; and risks associated with Sun's ability to achieve expected cost reductions within expected time frames. Please also refer to Sun's periodic reports that are filed from time to time with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and its Quarterly Report on Form 10-Q for the fiscal quarter ended September 28, 2008. Sun assumes no obligation to, and does not currently intend to, update these forward-looking statements.

To supplement Sun's preliminary financial results presented in accordance with GAAP, Sun provides non-GAAP net income and non-GAAP net income per share data on a diluted basis. The presentation of these non-GAAP financial measures should be considered in addition to Sun's GAAP results and are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Sun's management believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain gains, losses and charges that may not be indicative of Sun's core business operating results. Sun believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing Sun's performance. These non-GAAP financial measures also facilitate comparisons to Sun's historical performance and its competitors' operating results. Sun includes these non-GAAP financial measures because management believes they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. Non-GAAP measures are reconciled to comparable GAAP measures in the table entitled “Calculation of Non-GAAP Net Income (Loss)” following the text of this press release.

About Sun Microsystems, Inc.

Sun Microsystems develops the technologies that power the global marketplace. Guided by a singular vision -- "The Network is the ComputerTM" -- Sun drives network participation through shared innovation, community development and open source leadership. Sun can be found in more than 100 countries and on the Web at http://sun.com.

Sun, Sun Microsystems, the Sun logo, Java, Solaris, MySQL, ZFS, and The Network Is The Computer are trademarks or registered trademarks of Sun Microsystems, Inc. or its subsidiaries in the United States and other countries.

(in millions, except per share amounts)

Three Months Ended

Six Months Ended

December 28, December 30, December 28, December 30,
2008 2007 2008 2007
Net revenues:
Products $ 1,939 $ 2,249 $ 3,703 $ 4,229
Services   1,281     1,366   2,507     2,605
Total net revenues 3,220 3,615 6,210 6,834
Cost of sales:
Cost of sales-products 1,180 1,161 2,323 2,190
Cost of sales-services   690     701   1,336     1,330
Total cost of sales   1,870     1,862   3,659     3,520
Gross margin 1,350 1,753 2,551 3,314
Operating expenses:
Research and development 411 463 834 909
Selling, general and administrative 916 995 1,836 1,934
Restructuring charges and related impairment of long-lived assets 222 32 285 145
Purchased in-process research and development - 1 - 1
Impairment of goodwill   -     -   1,445     -
Total operating expenses   1,549     1,491   4,400     2,989
Operating income (loss) (199 ) 262 (1,849 ) 325
Gain (loss) on equity investments, net (3 ) - 5 22
Interest and other income (expense), net   10     53   (1 )   111
Settlement income   -     -   -     -
Income (loss) before income taxes (192 ) 315 (1,845 ) 458
Provision for income taxes   17     55   41     109
Net income (loss) $ (209 ) $ 260 $ (1,886 ) $ 349
Net income (loss) per common share-basic $ (0.28 ) $ 0.32 $ (2.53 ) $ 0.42 (1 )
Net income (loss) per common share-diluted $ (0.28 ) $ 0.31 $ (2.53 ) $ 0.41 (1 )
Shares used in the calculation of net income (loss) per common share-basic   743     806   746     836 (1 )
Shares used in the calculation of net income (loss) per common share-diluted   743     826   746     855 (1 )
(1) Amounts have been restated to reflect the one-for-four reverse stock split effective November 12, 2007.
(in millions)
December 28,

  June 30,  

2008 2008 (1)
Current assets:
Cash and cash equivalents $ 1,630 $ 2,272
Short-term marketable debt securities 1,014 429
Accounts receivable, net 2,574 3,019
Inventories 592 680
Deferred and prepaid tax assets 211 216
Prepaid expenses and other current assets, net   1,087   1,218
Total current assets 7,108 7,834
Property, plant and equipment, net 1,645 1,611
Long-term marketable debt securities 364 609
Goodwill 1,700 3,215
Other acquisition-related intangible assets, net 413 565
Other non-current assets, net   454   506
$ 11,684 $ 14,340
Current liabilities:
Current portion of long-term debt $ 569 $ -
Accounts payable 1,290 1,387
Accrued payroll-related liabilities 615 734
Accrued liabilities and other 1,204 1,105
Deferred revenues 2,070 2,236
Warranty reserve   184   206
Total current liabilities 5,932 5,668
Long-term debt 694 1,265
Long-term deferred revenues 521 683
Other non-current obligations 1,014 1,136
Stockholders’ equity:
Preferred stock - -
Common stock and additional paid-in-capital 7,492 7,391
Treasury stock, at cost (2,699) (2,726)
Retained earnings (accumulated deficit) (1,602) 430
Accumulated other comprehensive income   332   493
Total stockholders’ equity   3,523   5,588
$ 11,684 $ 14,340
(1) Derived from audited financial statements.
(unaudited, in millions)

Six Months Ended

December 28, December 30,
2008 2007
Cash flows from operating activities:
Net income (loss) $ (1,886 ) $ 349
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 214 241
Amortization of acquisition-related intangible assets 152 148
Stock-based compensation expense 101 100
Purchased in-process research and development - -
Impairment of goodwill 1,445 -
(Gain) loss on investments and other, net 17 (22 )
Tax provisions for employee stock plans - -
Deferred taxes - 8
Changes in operating assets and liabilities:
Accounts receivable, net 443 187
Inventories 87 (104 )
Prepaid and other assets, net 161 (30 )
Accounts payable (99 ) (110 )
Other liabilities   (431 )   143  
Net cash provided by operating activities   204     910  
Cash flows from investing activities:
Increase in restricted cash (3 ) (19 )
Purchases of marketable debt securities (888 ) (1,030 )
Proceeds from sales of marketable debt securities 221 509
Proceeds from maturities of marketable debt securities 276 379
Proceeds from sales of equity investments, net 7 27
Purchases of property, plant and equipment, net (285 ) (235 )
Payment for acquisitions, net of cash acquired   -     (41 )
Net cash used in investing activities   (672 )   (410 )
Cash flows from financing activities:
Purchase of common stock under stock repurchase plans (130 ) (2,000 )
Proceeds from issuance of options and ESPP purchases, net 20 102
Proceeds from issuance of convertible notes, net - -
Principal payments on borrowings and other obligations   (9 )   (8 )
Net cash used in financing activities   (119 )   (1,906 )
Effect of changes in exchange rates on cash and cash equivalents   (55 )   -  
Net decrease in cash and cash equivalents (642 ) (1,406 )
Cash and cash equivalents, beginning of period   2,272     3,620  
Cash and cash equivalents, end of period $ 1,630   $ 2,214  
(in millions, except per share amounts)
Three Months Ended
September 28, December 28, December 30,
2008 2008 2007
Calculation of non-GAAP net income (loss):
GAAP net income (loss) $ (1,677 ) $ (209 ) $ 260
Purchased in-process research and development - - 1
Amortization of acquisition related intangibles 80 72 74
Stock-based compensation 49 52 52
Restructuring and related impairment of long-lived assets 63 222 32
Impairment of goodwill 1,445 - -

(Gain) loss on equity investments, net

(8 ) 3 -
Tax effect of non-GAAP adjustments   (17 )   (26 )   (10 )
Non-GAAP net income (loss) $ (65 ) $ 114   $ 409  
Diluted non-GAAP net income per share (loss) $ (0.09 ) $ 0.15   $ 0.50  
Shares used in the calculation of non-GAAP net income (loss) per common share – diluted   749     746     826  

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