| Fiscal Years Ended June 30, | ||||||||||||||||||||||||||||||||||
| 2008 | 2007 | 2006(1)(2) | 2005 | 2004 | ||||||||||||||||||||||||||||||
| Dollars | % | Dollars | % | Dollars | % | Dollars | % | Dollars | % | |||||||||||||||||||||||||
| (In millions, except percentages and per share amounts) | ||||||||||||||||||||||||||||||||||
| Net revenues |
$ | 13,880 | 100.0 | % | $ | 13,873 | 100.0 | % | $ | 13,068 | 100.0 | % | $ | 11,070 | 100.0 | % | $ | 11,185 | 100.0 | % | ||||||||||||||
| Cost of sales |
7,425 | 53.5 | 7,608 | 54.8 | 7,439 | 56.9 | 6,481 | 58.5 | 6,669 | 59.6 | ||||||||||||||||||||||||
| Gross margin |
6,455 | 46.5 | 6,265 | 45.2 | 5,629 | 43.1 | 4,589 | 41.5 | 4,516 | 40.4 | ||||||||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||||||||
| Research and development |
1,834 | 13.2 | 2,008 | 14.5 | 2,046 | 15.7 | 1,785 | 16.1 | 1,926 | 17.2 | ||||||||||||||||||||||||
| Selling, general and administrative |
3,955 | 28.5 | 3,851 | 27.8 | 4,039 | 30.9 | 2,919 | 26.4 | 3,317 | 29.7 | ||||||||||||||||||||||||
| Restructuring charges and related impairment of long-lived assets |
263 | 1.9 | 97 | 0.7 | 284 | 2.2 | 262 | 2.4 | 344 | 3.1 | ||||||||||||||||||||||||
| Impairment of goodwill and other intangible assets |
— | — | — | — | 70 | 0.5 | — | — | 49 | 0.4 | ||||||||||||||||||||||||
| Purchased in-process research and development |
31 | 0.2 | — | — | 60 | 0.5 | — | — | 70 | 0.6 | ||||||||||||||||||||||||
| Total operating expenses |
6,083 | 43.8 | 5,956 | 42.9 | 6,499 | 49.7 | 4,966 | 44.9 | 5,706 | 51.0 | ||||||||||||||||||||||||
| Operating income (loss) |
372 | 2.7 | 309 | 2.2 | (870 | ) | (6.7 | ) | (377 | ) | (3.4 | ) | (1,190 | ) | (10.6 | ) | ||||||||||||||||||
| Gain (loss) on equity investments, net |
32 | 0.2 | 6 | — | 27 | 0.2 | 6 | 0.1 | (64 | ) | (0.6 | ) | ||||||||||||||||||||||
| Interest and other income, net |
161 | 1.2 | 214 | 1.5 | 114 | 0.9 | 133 | 1.2 | 94 | 0.8 | ||||||||||||||||||||||||
| Settlement income |
45 | 0.3 | 54 | 0.4 | 54 | 0.4 | 54 | 0.5 | 1,597 | 14.3 | ||||||||||||||||||||||||
| Income (loss) before taxes |
610 | 4.4 | 583 | 4.2 | (675 | ) | (5.2 | ) | (184 | ) | (1.7 | ) | 437 | 3.9 | ||||||||||||||||||||
| Provision (benefit) for income taxes |
207 | 1.5 | 110 | 0.8 | 189 | 1.4 | (77 | ) | (0.7 | ) | 825 | 7.4 | ||||||||||||||||||||||
| Net income (loss) |
$ | 403 | 2.9 | % | $ | 473 | 3.4 | % | $ | (864 | ) | (6.6 | )% | $ | (107 | ) | (1.0 | )% | $ | (388 | ) | (3.5 | )% | |||||||||||
| Net income (loss) per common share — basic |
$ | 0.50 | $ | 0.54 | (3) | $ | (1.01 | )(3) | $ | (0.13 | )(3) | $ | (0.47 | )(3) | ||||||||||||||||||||
| Net income (loss) per common share — diluted |
$ | 0.49 | $ | 0.52 | (3) | $ | (1.01 | )(3) | $ | (0.13 | )(3) | $ | (0.47 | )(3) | ||||||||||||||||||||
| Shares used in the calculation of net income (loss) per common share — basic |
809 | 883 | (3) | 859 | (3) | 842 | (3) | 819 | (3) | |||||||||||||||||||||||||
| Shares used in the calculation of net income (loss) per common share — diluted |
822 | 902 | (3) | 859 | (3) | 842 | (3) | 819 | (3) | |||||||||||||||||||||||||
| As of June 30, | ||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||
| Cash, cash equivalents and marketable debt securities |
$ | 3,310 | $ | 5,942 | $ | 4,848 | $ | 7,524 | $ | 7,608 | ||||||||
| Total assets |
$ | 14,340 | $ | 15,838 | $ | 15,082 | $ | 14,190 | $ | 14,805 | ||||||||
| Long-term debt |
$ | 1,265 | $ | 1,264 | $ | 1,078 | (4) | $ | 1,123 | $ | 1,432 | (4) | ||||||
| Other non-current obligations(5) |
$ | 1,136 | $ | 1,285 | $ | 1,492 | $ | 1,083 | $ | 1,460 | ||||||||
| (1) | Includes the acquisitions of StorageTek and See Beyond |
| (2) | Adoption of SFAS 123(R), Shared-Based Payment |
| (3) | Amounts have been restated to reflect the one-for-four reverse stock split effective November 12, 2007. |
| (4) | Includes approximately $503 million and $257 million classified as current portion of long-term debt as of June 30, 2006 and 2004, respectively. |
| (5) | Includes deferred settlement income from Microsoft as of June 30, 2008, 2007 and 2006, long-term tax liabilities as of June 30, 2008, 2007 and 2006 and long-term restructuring liabilities for all periods presented. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Overview
We provide network computing infrastructure solutions that drive global network participation through shared innovation, community development and open source leadership. Guided by a singular vision, “The Network is the Computer”, we provide a diversity of software, systems, storage, services and microelectronics that power everything from consumer electronics, to developer tools and the world’s most powerful data centers. Our core brands include the Java technology platform, the Solaris Operating System, the MySQL database management system, Sun StorageTek storage solutions and the UltraSPARC processor. Our network computing platforms are used by nearly every sector of society and industry, and provide the infrastructure behind some of the world’s best known search, social networking, entertainment, financial services, manufacturing, healthcare, retail, news, energy and engineering companies. By investing in research and development, we create products and services that address the complex information technology issues facing customers today, including increasing demands for network access, bandwidth and storage. We share these innovations in order to grow communities, in turn increasing participation on the network and building new market opportunities while maintaining partnerships with some of the most innovative technology companies in the world.
Summary of Results
For the quarter ended June 30, 2008, as compared to the quarter ended June 30, 2007:
| • | Total net revenue decreased by $55 million, or 1.4%, primarily as a result of decreased revenue in the U.S. |
| • | U.S. net revenue decreased $148 million, or 9.4%. |
| • | Computer Systems product revenue decreased by $131 million, or 7.1%. |
| • | Gross margin as a percentage of net revenue decreased by 2.9 percentage points. |
| • | We recorded a restructuring charge of $104 million as compared to $15 million in the fourth quarter of fiscal 2007. |
| • | Cash flow from operations decreased from $564 million to $90 million. |
For the fiscal year ended June 30, 2008, as compared to the fiscal year ended June 30, 2007:
| • | We improved operating income by $63 million primarily through increased gross margins and reduced research and development expenses. |
| • | Our U.S. net revenue decreased $443 million, or 7.9%. |
| • | We improved gross margin as a percentage of net revenue by 1.3 percentage points to 46.5% in part due to component cost reductions and other operational efficiencies. |
| • | Research and development expenses decreased by $174 million, or 8.7%. |
| • | Selling, general and administrative expenses increased by $104 million, or 2.7%. |
| • | We recorded restructuring charges of $263 million as compared to $97 million in the prior year. |
| • | We recorded $31 million in charges for purchased in-process research and development associated with our recent acquisitions as compared to no charges in the prior year. |
| • | Products and Services deferred revenues increased by $213 million, or 7.9%. |
| • | Interest and other income decreased by $53 million, or 24.8%. |
| • | We ended the fiscal year 2008 with a cash and marketable debt securities balance of $3.3 billion and generated positive cash flow from operations of $1.3 billion. |
| • | We repurchased approximately 151 million shares of common stock, at an average price of $18.30 for a total cost of approximately $2.76 billion under our 2007 Stock Repurchase Plan. |
| • | We introduced next generation systems and storage solutions including the Sun SPARC Enterprise M8000 and M9000 servers based on the symmetric multiprocessing (SMP) architecture and utilizing the SPARC64 VI dual-core processor, specifically designed for high-volume, mission-critical computing. We introduced the Sun Netra T5220 based on the Ultra SPARC T2 processor, blades based on the UltraSPARC T2 processor and AMD Opteron processor the T5140 and T5240 CMT-based enterprise servers incorporating the UltraSPARC T2 Plus processor. Additionally, we introduced the T9840D enterprise tape drive and the Sun StorageTek VTL 2.0 Plus, an appliance that combines a server, disk storage and software in a single unit so that tape and disk storage resources can be deployed, managed, and monitored from a single point. |
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Net Revenues
For the fiscal year ended June 30,
(dollars in millions, except revenue per employee dollars in thousands)
| 2008 | Change $ | Change % | 2007 | Change $ | Change % | 2006 | |||||||||||||||||||
| Computer Systems products |
$ | 6,264 | $ | (191 | ) | (3.0)% | $ | 6,455 | $ | 458 | 7.6% | $ | 5,997 | ||||||||||||
| Storage products |
2,354 | 38 | 1.6% | 2,316 | (58) | (2.4)% | 2,374 | ||||||||||||||||||
| Products net revenue |
$ | 8,618 | $ | (153 | ) | (1.7)% | $ | 8,771 | $ | 400 | 4.8% | $ | 8,371 | ||||||||||||
| Percentage of total net revenues |
62.1 | % | (1.1) pts | 63.2 | % | (0.9) pts | 64.1 | % | |||||||||||||||||
| Support Services |
$ | 4,023 | $ | 61 | 1.5 | % | $ | 3,962 | $ | 284 | 7.7 | % | $ | 3,678 | |||||||||||
| Professional Services and Educational Services |
1,239 | 99 | 8.7% | 1,140 | 121 | 11.9% | 1,019 | ||||||||||||||||||
| Services net revenue |
$ | 5,262 | $ | 160 | 3.1% | $ | 5,102 | $ | 405 | 8.6% | $ | 4,697 | |||||||||||||
| Percentage of total net revenues |
37.9 | % | 1.1 pts | 36.8 | % | 0.9 pts | 35.9 | % | |||||||||||||||||
| Total net revenues |
$ | 13,880 | $ | 7 | |||||||||||||||||||||