Storage Slows Down Sun

Sun Microsystems Inc. (Nasdaq: SUNW), buoyed by strong server sales and growing demand for its Solaris 10 operating system, posted a solid set of second quarter results today, although the vendor is still wrestling with its StorageTek acquisition. (See Sun Returns to Profitability and Sun to Acquire StorageTek for $4.1B.)

The vendor, after a turbulent few years characterized by layoffs and management reshuffling, finally returned to profitability today. Sun's revenues were up 7 percent year-over-year to $3.57 billion, just above analysts' estimates of $3.52 billion.

On a GAAP basis, Sun's earnings per share were 3 cents on net income of $126 million, compared to a net loss of 7 cents and $223 million in the same period last year. Analysts had estimated earnings of 1 cent.

Sun's storage revenues were something of a blot on the vendor's financials, and were down 7 percent year over year to $626 million. Speaking on a conference call earlier today Mike Lehman, the Sun CFO, said StorageTek's business in the corresponding year-ago quarter had been particularly strong, and admitted that the firms had experienced integration issues. "Most of the impact was in the U.S.," he said.

Combining some of StorageTek's legacy front-end systems with Sun's products posed problems in the quarter, according to the exec, trying to sound confident that this has now been resolved. "That's now behind us and we should be able to operate much more efficiently this quarter," he said.Analysts have already warned that Sun, unlike other storage vendors, did not enjoy a sales uptick during late 2006, thanks largely to StorageTek integration issues. (See Analysts See Mostly Bright Earnings.)

Thumper, Sun's recently launched storage-server hybrid product, was nonetheless something of a storage highlight in its Q2 results. "Revenues for that product were in the region of $20 million," said Lehman. "We expect the storage business, and this particular product, to perform well in the second half of the year," he added.

The server-storage hybrid may also set the agenda for future product offerings from Sun, according to the vendor's CEO Jonathan Schwartz. "We're in the process of building out the next-generation storage product line from Sun server platforms, along with Solaris and ZFS virtualization technology," he said during the conference call.

Sun did not provide an update on its mysterious "Honeycomb" product, a form of storage device that can execute application code, during its earnings call today. Nor did the vendor expand on its ongoing tape strategy.

Last October the vendor unveiled the long-awaited replacement for the Virtual Storage Manager (VSM) Open tape management technology it ditched earlier in 2006. (See Sun Opens Tape Again, Sun, FalconStor Develop VTL, and Sun Shuts Door on VSM Open.)StorageTek spent more than two years developing VSM Open, only for Sun to can the technology earlier this year, before the first units were even launched. Last year, Sun admitted that it was struggling with VSM Open, prompting frustration from StorageTek users waiting on the technology. (See StorageTek Users Voice Support Fears and Sun Closes on StorageTek .)

Sun's storage chief David Yen recently scotched rumors that suggested the vendor was planning to sell all or part of its storage business. (See Sun Storage Chief: We're Not for Sale.) Industry sources had claimed that Sun has talked to partner Hitachi Data Systems and perhaps others about selling all of its storage, or either its tape, disk or select parts of its disk business. (See Sun Storage Chief: We're Not for Sale.)

The market responded positively to Sun's Q2 results. In after-hours trading, Sun shares rose 47 cents (8.3 percent) to $6.14.

James Rogers, Senior Editor Byte and Switch