Thursday, October 30, 2008

How much did Sun lose on MySQL?

Sun Microsystems announced today that in its most recent quarter, it lost $1.67b on revenues of $2.99b. That’s a -56% net margin (if there were such a concept as negative margin), but only -5.6% without special charges. Compared to analyst expectations, the revenues were $150m low, as was the net income. Its gross margin also fell dramatically.

The NYT notes a consistent pattern of bad news

With falling revenue, problematic acquisitions, product slip-ups and a stock that has lost three-quarters of its value in the past year, the investment community is getting impatient with Sun’s management, including chief executive Jonathan Schwartz.

“Sun is a problem child, and the problem child has to change,” said Brent Bracelin, a hardware analyst for Pacific Crest Securities.
The Times estimates 40% of Sun’s total revenues come from financial services and telecommunications companies, two sectors that are now cutting back. Longtime CEO Scott McNealy was forced out 30 months ago because he never adjusted to the fact that the dot-com era was a one-time lucky break. So far, Jonathan Schwartz isn’t doing any better.

In today’s announcement, there is the minor problem of that $1.44 billion charge for “goodwill impairment” on unspecified business lines. There is no excuse for Sun’s obfuscation: the size of the charge is clearly material, while being truthful would not provide advantage to any competitor. Instead, it’s just management seeking to avoid accountability for its recent mistakes.

In particular, the presumption is that most (if not all) can be attributed to overpaying for two recent acquisitions, the $4.1b purchase of StorageTek in 2005 and the $1b purchase of MySQL (for 20x revenues) earlier this year.

On InfoWorld, MBA-touting blogger Savio Rodrigues estimated $2.48 billion in goodwill booked between the two sales. By his calculations, MySQL is 29% of the total, which (if pro rata is a fair allocation) would be a $420m charge on the purchase. Rodrigues reminds us that eBay took a $1.4b writeoff for its purchase of Skype.

The MySQL purchase was intended to give Sun a lynchpin role in the open source world. But the shift to get open source religion was too late. The acquisition isn’t going well for either side: Schwartz clearly overpaid by hundreds of millions of dollars while MySQL is being strangled by the Sun bureaucracy.

Maybe it’s a lack of imagination, but I don’t see where Sun can go and how they can get there — or that they would ever do it, even if they knew where and how to go. By comparison, Motorola’s problems look easy: at least they’re in a growing market.

1 comment:

Frederic Pariente said...

I believe MySQL is not to blame for Sun's recent goodwill impairment. If you look at the revenue data per product line, MySQL is actually growing. You may want to check out this blog post on Sun's Q1FY09 earnings for details and a point why StorageTek is the culprit.

In fact, Sun is just starting to monetize MySQL. With the announcement of Sun Systems for MySQL Sun is leveraging the MySQL brand and market demand to acquire new customers for its core server/storage product lines.