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To: tejek who wrote (130581)	3/21/2001 12:12:16 PM
From: bigja	Read Replies (2) \| Respond to of 186894

Tejek and Thread, Talk about vapor product launches. Looks like US-3 is no where to be found...... SUNW: Field Interviews Reveal that US-3 Products Still Not Shipping in the Reseller Channel - New US-3 Offerings to be Announced Wednesday, but Is Production Ready? HIGHLIGHTS SUNW is scheduled to launch the midrange of its US-3 server line on Wednesday in New York (10 a.m., 787 Seventh Avenue). * Our interviews with 15 SUNW distributors, resellers and customers over the last three days reveals that existing US-3 products (the SunBlade 1000 and SunFire 280R server, announced September 27/00) are still NOT shipping through the reseller channel (which represents about half of SUNW's annual sales). Additionally, SUNW's online store reveals that these products are "constrained". SUNW's sales office all told us that the products were not immediately available. * Our interview results are disappointing considering SUNW announced general availability of the SunBlade and SunFire last September, and distributors noted that the availability date has been pushed out s everal times (current expectations are that the workstation will be available in April and the entry server in May). We attribute the ongoing delays to microprocessor yield levels at Texas Instruments, which appear to have ramped much more slowly than expected. * Ongoing delays in US-3 raise two big questions: (1) What specifically has mired rollout/board yields so badly (SUNW has had only limited availability of US-3 products to select, large accounts); (2) Why should investors be confident that ramp issues are resolved and that SUNW can successfully ship backlog on existing products AND meet new incremental demand for the Serengeti products they plan to announce on Wednesday? * On Wednesday, we expect SUNW to formally introduce its midrange server line (dubbed "midframes", i.e., midrange mainframes), which we expect will include an eight-processor Sun Fire 3800, 12-processor Sun Fire 4800 and 24 processor Star Fire 6800. We expect the announcement will tout the huge (2x - 4x) applications performance improvement of the US-3 machines and underscore RAS (reliability, availability and scalability) that is comparable to mainframes. * Continued delays in the US-3 ramp are reflective of recent execution weakness from SUNW (US-2 level 2 cache memory issue, weakening gross margins), which is uncharacteristic of the company. Uncertainty around the delay's root cause and likely impact going forward is discomforting for investors and customers alike. A weaker demand environment does cushion SUNW somewhat, but further delays could provide more ammunition for SUNW's competitors and potential share loss. INVESTMENT CONCLUSION SUNW remains the "highest beta" stock in our coverage universe. Its extraordinary 2000 has set up extremely difficult comparisons, especially in light of the fall-out from telco players and dot coms. Given that its business system has limited recurring revenues (see Exhibit 1), we do think the stock is most vulnerable to further downward revisions, especially if demand in the rest of the world weakens. At $17, we believe SUNW's valuation is attractive, and at $14, we think the stock trades at effectively a market multiple on CY 02 earnings, which we think is a compelling entry point. While there is no apparent short-term catalyst, long-term investors may be well served by buying SUNW opportunistically. We maintain a market-perform rating on SUNW. DETAILS In our December 14 Research call (see, "SUNW: Reseller Interviews Suggest Q4 is On Track, but Alarmingly, UltraSparc III Products are Nowhere to be Found!!!") we noted that US-3 systems were not shipping in the reseller channel, which amounts to around 50% of SUNW's business, and suggested that chip ramp issues were the problem. SUNW has begrudgingly acknowledged that there have been chip ramp/yield issues, but is plowing ahead with a broad launch of its midrange offerings. We think that the most important aspect of the launch will be factually reassuring customers and investors that the chip is now at full ramp and will not cause further delays (as evidence of this uncertainty, rumors have begun to spread in the reseller community that there are problems with the US-3 chip). SUNW is expected to introduce its midrange server offerings on Wednesday in New York. We expect three models, ranging up to 24 microprocessors. We expect that the high-end Star Cat (128+ processor E10000 replacement) will be formally announced in the early summer, although we have heard that a demo might be on display at the launch Wednesday. Exhibit 2 provides an overview of current US-2 and US-3 and expected US-3 offerings. What is unique about the new family of servers is that they will all share a common architecture (the e10000 was inherited from Cray and did not share everything with SUNW's current midrange line), making parts sharing more prevalent, inventory management easier, and manufacturing more scale-efficient. Questions to Ask As is customary, we have prepared a list of questions to ask at the Serengeti launch: 1. What were the root cause delays in the US-3 ramp to date? How can investors be confident that further delays will not occur with rollout of current systems? When will each of the US-3 offerings be generally available through SUNW's direct salesforce AND resellers? Is availability of 750 MHz and 900 MHz systems coincident? 2. How meaningful is SUNW's existing backlog for US-3 offerings? How much is for 750 MHz vs. 900 MHz systems? How quickly can SUNW lower this backlog down, and what impact, if any, will it have on US-3 based systems? 3. The number of US-3 offerings pales in comparison with those of US-2 (see Exhibit 2) - Will the US-3 product line be narrower in scope than US-2? Why? 4. Approximately how long will SUNW continue to offer US-2 products? (We estimate that current midrange products will be offered for perhaps as long as a year, and that the e10000 may be offered for another 2 years). 5. Has part of SUNW's recent gross margin deterioration been due to start-up costs associated with the US-3 ramp? Has the slow ramp/poor yields cost SUNW more than originally anticipated? How much more? 6. Given that US-3 requires Solaris 8 (and that some customers will only choose to upgrade to 8 once it is formally approved within their dept./organization), what percentage of SUNW's customer base is currently on Solaris 2.6 vs. 7 vs. 8? Are all major Solaris applications now ported to take full advantage of Solaris 7/8? 7. If applications are currently not 64-bit enabled, what kind of performance boost will be experienced by migrating them to US-3 and and Solaris 8?