Sun Documents Reveal Challenges Ahead

Sun Microsystems Inc., Mountain View, Calif., the network computing giant popularly known for its high-end workstations and Java programming language, offers a candid glimpse of its thoughts about the competition and the changing shape of the computer marketplace in its recent filings with the Securities and Exchange Commission.

If you thought the pressure on systems integrators and end users was intense, you should review Sun's 818,000 kilobyte report (http://www.sec.gov/Archives/edgar/data/709519/0000950005-96-000770.txt).

Reflecting the frenzied pace of computer product development, introduction and transition, the company's filing depicts the intensely competitive environment of the industry and shows how a key player defines the evolving marketplace.

Using terms such as "downsizing," where larger companies distribute processing resources based on a network computing model, "upsizing," in which smaller companies increase network computing capacity in different environments, and "rightsizing," where companies seek the proper network mix from multiple vendors,

Sun sees customer buying patterns shifting toward distributed systems on multiple platform networks.

Looming in its competitive background and likely to affect the company's market position are the expected improvements in microprocessor technology and products from Intel and Motorola, as well as new product introductions from Hewlett-Packard, IBM, Digital Equipment Corp. and Silicon Graphics.

Of course, there's the pounding beat of Microsoft's footsteps, especially its improving operating systems software.

The bottom line? Sun "expects this [product] pressure to intensify in fiscal 1997 with the availability of Pentium Pro systems running Windows' NT server software."

As if that were not enough, Sun admits to "facing increasing competition... from personal computer manufacturers such as Compaq Computer Corp. and Dell Computer Corp., with respect to products based on microprocessors from Intel Corp. coupled with Windows' NT operating system software from Microsoft Corp. These products demonstrate the viability of certain networked personal computer solutions and have increased the competitive pressure, particularly in the company's workstation and lower-end server product lines," according to the report.

In the key area of new product development, Sun puts its revenue focus on the recently introduced UltraSPARC family, a series of enhanced desktop workstations and server systems based on a 64-bit microprocessor running at speeds of 143 mhz to 200 mhz. The targeted user is the professional who demands more specialized graphics power.

"Future operating results will depend to a considerable extent on the company's ability to rapidly and successfully complete the integration of UltraSPARC into the company's workstation and server product lines," the report said.

Financially, the company reported sound results as net revenues rose 20 percent to $7,095 million in fiscal 1996. Gross margin was 44 percent of net revenues while net profit margin was 6.7 percent, which was strong compared to 6 percent in fiscal 1995 and 4.2 percent in fiscal 1994.

Reflecting its solid performance year, Sun on Aug. 8 announced a two-for-one stock split payable to holders of record on Nov. 18. Last November, the company also split its stock two-for-one.

And, just to keep things in perspective, note this Monty Python-esque reminder in the report about the location of Sun and the large majority of America's computer industry:

"Sun's California manufacturing plant, the majority of its research and development facilities, its corporate headquarters and other critical business operations are located near major earthquake faults. Operating results could be materially adversely impacted in the event of a major earthquake."