This is the SUNW conf call summary for 12/97
Thread, please find enclosed an almost complete summary of the SUNW CC. The reason why I write this only now is that first, I was busy over the weekend with an article on the SI Asia Forum that will be published next week by Mark Johnson, and secondly, after my considerable charms and professional background yielded me the magic no., I promised the SUNW IR folks not to disclose the CC phone#. I thought you still might like to read what was going on at that CC for 12/97.
I listend thru the prepared remarks and the first five or six analysts who asked questions IMO, I thought many asked only for asking's sake, like: "Do you plan to increase the level of direct selling via the Internet and implement build-to-order programs?" So I hung up eventually after the guy from Gayowa or Iowa Research or something.
Please bear with me with all the tech stuff of model nos. Also, please refrain if possible to read too much into any single word or phrase. Please ask if some things are not so clear. I think I have a pretty good understanding what was more significant and what less so. Enjoy!
The CC was held by Mark Paisley, IR boss, Scott, Ed Zander and the CFO Mike (Lehman?) on 01/15/98.
Prepared remarks by CFO Lehman:
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Revenue for 2nd Q $2.45bn, +18% y-o-y, net inc before charges $223.2m +25% y-o-y. EPS before charges $0.57 vs. 0.46 on a "diluted" basis (as per FASB 15). One time charges of $110.5m for several aquisitions.
Overall the CFO is "very pleased" with overall performance, despite the "product line essentially being unchanged" from the 1st qtr ago. The only new products were the new "Darling" machines of which only "a minimum amount" have been shipped until 12/28/97. CFO feels SUNW "clearly has a quite competitive mix of product line".
The strong USD impacted revenue negatively by -4%. SUNW had "accellerating USD revenue growth in all regions except Japan." Revenue growth for the geograhic regions were as follows (in USD): U.S. +19%, Europe +22%, Rest of world +23%. The CFO stressed that in local currencies they were doing "extremely strongly": Revenue in local currencies were up in Germany +40%, U.K. +25%, France +35%, Mediterranean countries +40%, China +35% and SEA/Pacific countries +20%, Southern hemisphere +50%.
CFO said they were "concerned about macro-economic conditions in specific countries in the SEA region, mentioning Japan and Korea specifically. We're monitoring closely our levels of investments, but we are long-term committed to this important region."
Systems and Services sales "continued to have the highest overall growth rates"; OEM and technology sales saw "a nice pickup". Gross margins improved to slighlty above 52%. An important contributing factor to this were "significant cost decreases for key product components".
CFO expects the U.S.Dollar "continues to remain strong", especially vs. the Yen.
R&D expenditures increased by about 55% or 10.6% of revenue. SUNW expects this increased level of spending to continue, as "there are many exiting possibilities out there for our technology and we try to go after them"; also R&D spending on tech development of recently aquired businesses.
SG&A +0.5% up as percentage of total revenue, as process re-engineering continues; also spending more on marketing programs and brand advertising, etc. MAy increase in the 2nd 6 mo. of the FY as builing brand recognition is a prority.
1700 new employees were hired, mainly in Marketing & Sales, and Engineering depts.
Operating income growth termed "very robust in a pretty rough environment".
On the balace sheet, about $900m in cash & equiv., slightly under expectations but still "comfortably within projected parameters". All other B.S. items in line with expectations like A/R, A/P, etc. Construction (presumably plants, production lines, etc.) is going on on three sites in Boston, New Jersey (Newark?) and in Colorado. I think this was one contributing factor for the lower cash level, as these things were mentioned in the same sentence.
CFO said currently "we do not plan to offer any new shares during the 3rd quarter under the recent shelf registration, but it's a dynamic process, so we may change our views there quickly."
That was it for Mike.
Ed Zander comments (talked like machine gun, hard to follow):
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Views SUNW as only single true alternative to PCs and NT. Said SUNW passed HWP and IBM as no.1 in Unix hardware and storage solutions.
On the high-end segment, 5600 and 10000 machines: +50% y-o-y shipments. About 100+ 10000-mach. shipped in the 2nd Q. SUNW manufacturing capacity for these servers recently increased by 50%. I'm not sure about this one: World-wide installed SUNW machines: 10'000 units (maybe that's 10'000 only for high-end servers).
But sure about these nos.: Installment base: 20% in Finance, 21% in Telco's, 10% in Manufacturing, 10% in Governments, rest in retailing (and some others, don't remember).
On the Enterprise level (450's): noted strong bookings, "about 20 existing customers took advantage of SUNW trade-in programs".
Benchmark-wise one beat CPQ brand-new 7000 series.
Over 1000 installations of SAP (I think that was SAP alone) on SUNW machines world-wide, plus Oracle, Baan and Peoplesoft (no detailed figures there).
On desktops and new Darlings: Existing machines held ground "surprisingly well", said "very exited initial reactions from the marketplace and customers, as well as the press, for the new Darlings desktops" Sales reps see unsolicited calls coming in asking about them. Mentioned that Darlings and Ultras are capable of running MS Office (didn't say anything about what emulations or in native or what).
On Java: No real hard facts from Ed. Only positive comments about public should stay tuned for good things to come down the road over the next few months, work is still being done on Java (i.e.performance issues).
One notable thing as we are speculating about a big Java annoucement out soon: Zander said he was in touch with "one very large, if not the biggest, maybe the biggest manufacturing co. in the New Jersey area" and he expected "that some business should come out of this" and implied an announcement soon. Can this be IBM?
Storage technology: Said to watch out for an announcement on 01/28 at the occasion of the yearly analysts meeting. I don't remember what the particular context was. Anyway, an announcement.
Mentioned customer/contract wins: EDS, GM, an AT&T 60 Terabyte (!) data wharehousing project, Pepsico, Dow Corning, Northern Telecom (I guess of Canada), Telecom Italia Mobile (bought some 10000-line servers), Franklin Resources (mutual funds business) wants some storage solution/RAID), one airline (didn't understand the name; maybe Northwestern?). Could cite about a dozen important ones more, but didn't. Stressed SUNW beat HWP at least 4 times from the above list, and also IBM. Said: "We're winning at the high-end."
Competition: Mainly IBM and HWP. I got the feeling that they are more concerned with IBM.
NT still considered "very competitive". Tried to counter that by "training the sales force better, trying to get out the message of scalability". And "emphasizing the fact that we are the only ones that take on NT head to head."
All in all Zander said SUNW had a "very, very strong quarter in terms of execution of the business plan."
So much for Ed.
Remarks by Scott (soundly flabby at times, downplaying MSFT like kid stuff and so, but maybe that's his style. I heard him "live" for the first time. Sure no lack of ego.)
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Scott focused on talking about where SUNW is investing right now: three areas: microprocessors, Solaris and Java.
On procs: UltraSPARC III is a "huge and major investment", expecting much good from it in terms of performance, etc. Also in the process of developing at the low end to put a "Java optimized machine" (or processor?) together.
On Solaris: Solaris version 2.6 added with 100+ new features, said "the best just got better". V. 2.6 is "fully Y2K compliant, which is nice" (he said "nice").
Made some bullish remarks on the 450 series saying something like Solaris 2.6 is propelling the 450s, we are clearly gaining incremental business. Mentioned something from a "Rocky Mountains health plan" that provided SUNW with big business.
Stressed again the deal with INTC and Merced: "Solaris will be capable to take advantage of all the features of Merced."
Downplayed the significance of the loss against DEC in the deal with Sequent., saying it was "not a big deal."
Scott said "NT is Solaris of '93 or Solaris is NT version 8.0" (He literally said that).
On Java: Sees great potential for Java and the consumer market: Visa recently mad a big commitment to Java for their SmartChip cards. From these and other deals he expects "some non-trivial contributions to the bottom line".
So far about 140 cos. have licencensed Java from all sorts of industries. Said: "Everybody is very comfortable with the Java strategy also vis-a-vis MSFT."
Scott sees "huge upside in extending the brand recognition for SUNW". Therefore, expect to increase spending on TV ads; also mentioned ads during this year's Superbowl.
That was Scott.
Q&A session (didn't catch the names of all the guys and gals)
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Geena ??? from ???: on bookings and order backlog: Backlog stands at $2.566bn on 12/28/97, therefore bk-to-bill ratio is greater than one. No further details.
Steve Milunovich from ML: Impact of Y2K business positive? Well, no firm grasp yet, as customer budgets are there, but spending plans are not clear. Will see how it unfolds, expects to get a clearer picture in the fiscal 2nd half.
Threat from DEC/Alpha, standing with ISPs? "We stand extremely well all over the Internet and Intra-Nets, we see DEC/Alpha is not growing in this segment anymore. You should go with the cos. that are growing." (implying that SUNW was growing).
George ??? from Lehman Bros: Impact of Asian flu? "We mostly bill in USD, so there is no effect of their currencies being down. The real issue is products demand from the region. Obviously we monitor closely, but so far no more details; Japan and Korea mentioned before already.
Steven ??? from Pain-Webber: Future gross margins pressure? "We have said for the last 5 years that gross margins come down and we managed to keep them, but we must say it again, as there are 5 business lines, and that make an aggregate forecast difficult if not impossible. So yes, gross margins could be down in the future"
SUNW guy also mentioned something about 450 mid-range line is a "surprisingly strong segment of business".
Goldman Gal: When will the 50% capacity increase for Starfire line be needed? "We see demand volume should pick-up soon."
On SUNW as a whole: "To gain an idea for growth rate it is more sensible to look at a rolling 6-mo or 9-mo average growth rate, not focus on y-o-y comparisons. Right now we are at a rate of +19%." He did not go on to say whether this trend will continue.
Did you adjust spending bugets after the 6-mo? "We continuously watch our spending patterns/amounts, but no, we did not adjust budgets in any significant way."
Guy from Buckingham (?) Research: May R&D and SG&A decline relatively a little in the 2nd half? "Don't worth betting on it; it may be due to increased revenues, but no promises."
Thomas ??? from M-S: How about a breakdown of sales by product/product lines? CFO: "Are you kiddin'? Next one, please!"
Arrogant, sleepy guy from Wasserstein Perella: About Starfire orders from new customers? Ed: "I don't have the figures with me (implying: I'm probably not going to give them to you anyway)."
Sorry, I was a sleep before: Where does Solaris beat NT? Scott: "NT? Next question, please!"
Guy from Gaiowa/Kiowa/Iowa Research: Plans for outside financings? "We have the shelf registration in place to act quickly if deemed opportune. But main focus is to finance R&D and cap ex from cash generated from the business.
Impact on 3rd Q revenues/EPS of possibly weak Japan sales in calendar 1st Q, as last year? "Yes, if, as last year, Japan comes in rather weakly, there will be an negative effect. But we had this situation last year already, so comparisons are not that difficult. But we are watching closely."
With this I've heard enough and hang up. I have listened and written this as best as I possibly could. With this in hands, I suggest that SUNW IR is a good place to make follow-ups on individual questions. Maybe we can also clarify some things among us. I do not have a tape recording simply for the fact that I don't have the equipment in place. But I'll see that next time I'll have one.
Best regards,
Thomas |
