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Sun posts $1.7B revenue loss, but storage business up

Beth Pariseau
Despite a $1.7 billion loss in net income last quarter, Sun Microsystems reported its storage business squeezed out a bit of revenue growth in the quarter.

CEO Jonathan Schwartz said revenue for storage products was $507 million, an increase of 0.4% over the same quarter a year ago. Disk and array-based product billings grew 3% while tape declined 4%, he said.

Following several changes in direction and restructuring after the $4.1 billion acquisition of tape vendor StorageTek in 2005, Sun converged its storage and server businesses about a year ago into one systems business. Since then, it has been pushing "open source storage" as its long-term strategy.

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Open source storage from Sun is primarily built on components such as its SunFire X4500 Thumper storage server and ZFS. Open source storage, and specifically adoption of ZFS, are showing "aggressive growth," but Sun did not attach specific numbers to them.

"All in all, it was a tough quarter, but we continue to believe the popularity of open source systems and software is opening Sun to new customers and market opportunities across the globe," Schwartz said on Sun's earnings call. "We realize that these initiatives cannot immediately overcome a slowdown in our traditional businesses, but we are confident these initiatives represent the future of Sun.

"We believe we can expect strong growth in open storage as the adoption of ZFS continues and the need for open systems becomes ever more critical for customers seeking better performance at a lower price than traditional NAS."

The systems business unit formed out of what had been separate server and storage units has now taken a $1.445 billion write-down for "impairment of goodwill" based on "a combination of factors, including the current economic environment, Sun's operating results and a sustained decline in Sun's market capitalization," according to a Sun report. No further details about specifically which business units have lost goodwill in the market were given. Sun said this write-down was a preliminary estimate and further adjustments could follow.

Storage industry observers have their theories about where it might have come from. "The former [StorageTek employees] I've spoken to recently said that Sun is winding this operation down," wrote Illuminata analyst John Webster in an email to SearchStorage.com. "There are fewer and fewer of them left."

The company posted overall revenues of $3 billion, a 7.1% decline from the same quarter a year ago. Excluding the write-down, Sun lost $65 million in the quarter.

Sun attributed much of its woes to the wider economy, but not everybody was buying it. "I could buy the bad economy excuse if IBM and HP also had bad quarters. But they didn't, and so I can't," said Webster.

Sun "had a higher exposure to the financial industry … and was more vulnerable to the economic slowdown than some more diversified peers," Schwartz said .

However, given the relatively healthy storage revenue and an ongoing "serverization" of storage in line with Sun's vision, industry analysts are not counting out Sun, yet. "They're getting traction finally with the open source storage model, and I think you'll see other vendors starting to do it, as well," Webster said.

"Sun's had a major midlife crisis," said Taneja Group analyst Jeff Boles. The company has emerged with the server-storage convergence/open source identity, which "seems like it's locked in and might be good for the new cloud computing paradigm."

But, Sun has given itself many storage makeovers over the last three years. "The big question is, is this the real identity? Have they stopped gyrating and are they executing?" Boles asked.

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