Sun Federal Expects Dividend From AOL Alliance

By Richard McCaffery, Staff WriterJohn Marselle, president of Sun Microsystems Federal Inc., sums up his government strategy in four words: Sparc, Solaris, Java and Jini."That's clearly our message," he said. Strange words, but they describe the McLean, Va., company's sweep of products and its Internet strategy, from its Sparc microchips and Solaris operating software to its Java programming language and Jini technology, which allows ordinary devices like pagers to connect to the Internet.Sun Federal's parent, Sun Microsystems of Palo Alto, Calif., remains one of the few computer makers that does everything from writing software to building microprocessors and workstations. And it is gaining speed. Adjusted for a two-for-one stock split in March, Sun's stock price has more than tripled since November and now trades around $70 a share.Not bad, considering Sun competes with the industry's toughest players: Compaq Computer Corp. of Houston, IBM Corp. of Armonk, N.Y., and Microsoft Corp. of Redmond, Wash., to name a few."Sun's success is feeding on itself," Steve Milunovich, first vice president at Merill Lynch & Co., said in an April research report. "Sun is trading like an Internet stock." Its recent rise can be attributed to Sun's importance in Internet computing, its electronic commerce line, a recent stock split and new NT products, Milunovich said.Sun achieved record revenue and net income for the quarter ended March 28, with sales of $2.9 billion, up 24 percent, and income minus a one-time charge of $291 million, up 26 percent. Add to this Sun's alliance with America Online Inc. in November. The deal, announced at the same time as America Online's acquisition of Netscape Communications, has been a shot in the arm for Sun based on the surge of the company's stock price."I think it raised the level of visibility for [Sun]," said Frederic Dickson, research director at Branch, Cabell & Co. of Richmond, Va. Dickson expects to see Sun continue its strong growth in 1999. Last year, the company grew its top line 15 percent to $9.8 billion and its bottom line more than 20 percent to $906 million, minus one-time charges for acquisitions. Dickson expects to see Sun's earnings per share grow 15 percent in 1999.Under the alliance, Sun and AOL are developing an electronic commerce products line for commercial and government customers. Sun will provide $500 million worth of systems and services to AOL through 2002. The first co-developed product should be available in the first quarter of next year."Everything from paying your taxes to voter registration can be done using the Internet," he said. "In order to make it to the next level, there have to be comprehensive, integrated solutions that make every part of the process as easy to use as the telephone. The strategic alliance between Sun and AOL will enhance this process."Java and Jini are a big part of the strategy. Java, Sun's write-once, run-anywhere programming language created in 1995, is now being used by civilian agencies, the Defense Department and state and local governments. Customers include the U.S. Postal Service, NASA, the Treasury Department, the National Center for Missing and Exploited Children and Florida's strategic technologies department. Sun officials declined to break out Java revenues.Regarding Jini, Sun is in discussions with several agencies about pilot programs, though company officials declined to be specific. "It allows any device to participate in a network regardless of the underlying software or hardware. I'm talking any device — toaster, weapon, Palm Pilot, cell phone," Marselle said. Founded in 1982 by Scott McNealy and three partners, Sun Microsystems started out building high performance computers that used the Unix operating system. McNealy, the company's chairman, president and chief executive officer, steered Sun to an initial public offering in four years, $1 billion in sales in six years and a market value of $51 billion with operations in more than 150 countries. The company has 26,343 employees.Established in 1985, Sun Federal's customers include NASA, the Federal Aviation Administration, the Social Security Administration, the Army and the Air Force. Sun's business is split between the Department of Defense and civilian agencies. The bulk of its government work comes from contracts such as the Air Force Workstation Contract, NASA's Scientific and Engineering Workstation Procurements 2 contract, and the Tactical Advanced Computer Joint Workstation contract with the Navy, Marine Corps, Coast Guard and other defense agencies.Marselle was named president of Sun Federal in 1992. Since then, he has grown the unit's revenue from $300 million to more than $1.25 billion in 1998. Sun Federal's growth has slowed recently, largely because of economic trouble in Asia, said Marselle, who expects sales of $1.5 billion this year. Sun Federal has global accounts with many agencies such as the Department of Defense and Postal Service.Because of the slowdown in Asia, Sun Federal pushed back by one year its goal of reaching $2 billion in sales by 2001. Marselle is not worried. "We've been hitting the numbers we want to," he said. Sun Federal generates 14 percent of Sun Microsystem's total revenue. Growth in Europe and Latin America has been robust, and international sales make up a bigger portion of Sun Federal's sales than ever before, Marselle said. About 33 percent of Sun Federal's revenue comes from overseas, up from 25 percent two years ago. The rest comes from federal, state and local governments. Recent contract wins include a lucrative deal with the U.S. Postal Service won last April. The five-year award worth up to $500 million was the company's biggest federal win since 1996, said John Leahy, Sun's group manager of government affairs and public relations. Under the Scalable Midrange Computers contract, Sun will provide the Postal Service with servers, Solaris operating software and Java technology. Sun beat out Digital Equipment Corp. (now Compaq Computer Corp.), Hewlett-Packard Co. of Palo Alto, Calif., and IBM to win the award.It is the kind of contract Sun likes, because it involves all of its technologies, Marselle said. Sun is providing installation, programming, training and maintenance for the Postal Service at branches throughout the United States, Puerto Rico and the Virgin Islands.In January, Marselle was named acting vice president of The Americas, a unit that includes sales and systems engineering activity in the United States, Latin America and Canada. He oversees 3,500 employees and operations that generate $5.5 billion annually.