ITEM 1. BUSINESS
GENERAL
Sun's business is singularly focused on providing network computing products and
services. Network computing has been at the core of our offerings for the 22
years of our existence and is based on the premise that the power of a single
computer system can be increased dramatically when interconnected with other
computer systems for the purposes of communication and sharing of computing
power. Together with our partners, we provide network computing infrastructure
solutions that comprise computer systems (hardware and software), network
storage systems (hardware and software), support services, and professional and
knowledge services.
Our customers use our products and services to build mission-critical network
computing environments on which they operate essential elements of their
businesses. Our network computing infrastructure solutions are used in a wide
range of technical/scientific, business and engineering applications in
industries such as telecommunications, government, financial services,
manufacturing, education, retail, life sciences, media and entertainment,
transportation, energy/utilities and healthcare.
For the fiscal year ended June 30, 2004, we had revenues of $11.2 billion,
employed approximately 35,000 employees and conducted business in over 100
countries. We were incorporated in California in February 1982 and
reincorporated in Delaware in July 1987.
We can be reached on the Internet at http://www.sun.com. Our most recent annual
report on Form 10-K and certain of our other filings with the Securities and
Exchange Commission (SEC) are available in PDF format through our Investor
Relations website at http://www.sun.com/investors. Our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports are also available on the SEC website at http://www.sec.gov
which can be reached from our Investor Relations website. The contents of these
websites are not intended to be incorporated by reference into this report or in
any other report or document we file, and our references to the addresses of
these websites are intended to be inactive textual references only.
BUSINESS STRATEGY
Our business strategy is built around our singular focus on network computing.
Our computer systems (hardware and software), network storage systems (hardware
and software), support services, and professional and knowledge services are
designed to enable network solutions that attack cost and complexity, accelerate
service delivery and provide mobility with security. The core elements of our
business strategy include:
• An end-to-end architecture that extends our common Java™
technology-based programming environment across our SPARC (Scalable
Processor Architecture) technology implementation and new line of
x86-based products. These products provide exceptional
price-performance, flexibility and choice for devices as small as smart
cards and cell phones up through large multi-million dollar systems;
• On-going innovation in microprocessor architecture, systems design,
networking integration and software to help ensure continuing
technology leadership and resulting price-performance advantage;
• A commitment to interoperability and open application programming interfaces;
• A solution-based selling model with an emphasis on utilizing our
end-to-end network computing architecture platform to integrate our
products and services to address customers' strategic business
challenges and information technology needs;
• A robust partner community (iForce™), including independent software
vendors (ISVs), system integrators, resellers and original equipment
manufacturers (OEMs), which adds value to Sun products and services
and extends our reach and expertise; and
• A leading services organization that enables Sun and our partners to
deliver open, innovative solutions and optimize availability and
capabilities of our customers' IT environment in a cost-effective
manner.
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End-to-End Architecture
Developing and deploying services over the network requires an infrastructure
platform that is enterprise-ready, developer-rich and economically compelling.
This means that we are focused on providing the optimal combination of software,
hardware and services that will give the customer the best value. With this
strategy, we are focused on offering the customer a platform that entails lower
annual administrative costs, lower developer training costs and lower downtime
costs, which decreases customers' "total cost of ownership."
In fiscal 2004, we introduced a number of new products supporting our strategy
as an end-to-end infrastructure platform company. We improved the performance of
our UltraSPARC III processor and introduced the dual-thread UltraSPARC IV
processor across our mid and high-end server lines. Targeted for
mission-critical enterprise, High Performance Technical Computing (HPTC) and
other compute-intensive applications, the UltraSPARC IV processor provides up to
2x the throughput of UltraSPARC III based systems. The UltraSPARC IV processor
is fully binary compatible with our previous generation processor, so customers
can run existing applications without the time and cost of rewriting
applications.
We also strengthened our x86 low-end server product line and now provide
customers the choice of either the Linux or Solaris™ Operating System on x86. We
continued the deployment of our Solaris Operating System, which creates
significant benefits to customers by reducing system downtime and upgrade costs
because every release is designed to run existing applications currently running
on previous Solaris Operating System releases.
Our software consists of Sun's powerful and scalable Solaris Operating System,
Sun Java Enterprise System, Java Desktop System, Java Mobility System, N1 ™ Grid
System and the Java Studio development environment. Our software builds upon our
well-established Java technology to meet the needs of developers, CIOs and
operators to provide information, data and applications anywhere, anytime and on
any device, using open application programming interfaces that work with a wide
array of operating systems and applications.
Innovation
We believe that in order to be a leading developer of enterprise and network
computing products and technologies, we must continue to invest and innovate. As
indicated by our research and development investments of approximately 15-17% of
annual revenues during each of the last three fiscal years, we are continually
focused on technological innovation. Over the past few years, we have made
significant investments in several of our product and services technologies,
including investments in:
• The highly scalable UltraSPARC processor and systems architecture,
including our next generation processors that enable chip
multithreading to drive throughput computing at the processor level;
• The x86 system architecture and advanced systems technology,
including technology acquired through our purchases of Kealia and
Nauticus and our new AMD Opteron-based systems;
• The highly reliable and scalable Solaris Operating System;
• Mission critical clustering, messaging, directory and web services
infrastructure software;
• The cross-platform Java software development environment, spanning
smart cards, cellular handsets, set top boxes, desktop computers and
servers - used by our customers and independent software vendor
partners;
• Virtualization, provisioning and monitoring software architecture for
network computing resource optimization and systems management
simplification;
• Network-based storage systems and software, including storage
management software and Sun™ QFS and Sun SAM-FS software; and
• Connectivity tools to provide remote diagnostics and preventive
services for our customers.
Many of these technologies provide us with a competitive advantage and
differentiation in the marketplace. By investing in research and development, we
believe we are able to develop and deliver more valuable systems technology to
our customers. We intend to continue our investments into new computing
technologies and are focused on continuing to develop and deliver leading-edge
network computing products based upon our innovations.
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Interoperability
From inception, we have focused on developing products and technologies based
upon open application programming interfaces (APIs). We believe the real power
in computing lies in the ability to freely access and share information over the
network, while unconstrained by proprietary software and hardware standards. To
further strengthen our interoperability platform, and as part of our legal
settlement with Microsoft Corporation, we entered into an agreement that is
intended to enable greater interoperability of the two companies' products.
The need for open APIs is at the heart of the Internet's development. We believe
that without them, too many proprietary software and hardware protocols cause
both incompatibility and cost issues, making it too difficult and uneconomical
for individuals and organizations to fully access and harness the power of the
network. Through open APIs, we believe application adoption and service
deployments over the network will grow more quickly, increasing workload on the
network and leading to increased demand for our computer systems. In addition,
by adhering to open APIs, we are able to deliver more flexible and compatible
systems products to our customers, reducing administrative costs, enabling
provisioning and adding to the demand for our systems.
We deliver this performance through industry standards pioneered by Sun to
provide value to our customers. For example, we have created technologies, such
as the Network File System (NFS), UltraSPARC architecture and the Java
technologies, providing customers with flexibility for their networking
environments and facilitating industry growth. In addition, through our Sun Java
System software platform, we have extended our well-established Java technology
platform and utilized Web industry standards including XML (Extensible Markup
Language), SOAP (Simple Object Access Protocol), UDDI (Universal Description,
Discovery and Integration) and WSDL (Web Services Description Language).
Solutions-Based Selling Model
Our sales force is in the process of implementing a solutions-based selling
model whereby we offer an integrated and consistent set of end-to-end networking
architecture platform solutions to the marketplace. These solution sets
currently encompass six core competencies and/or capabilities: the Data Center,
Storage and Data Management, Desktop and Mobility, Identity and Security, Web
Services Software and Network Manageability. These competencies line up directly
with the three key strategies we present to our customers as part of the Sun
vision - attacking cost and complexity, accelerating service delivery and
enabling mobility with security. We believe our solutions-based selling approach
allows us to engage with our customers over the entire life cycle of their key
infrastructure projects, which brings our expertise to bear in accelerating the
delivery of sustainable value from the products and services we produce.
Alliances and Partner Community
In fiscal 2004, we continued to form relationships with significant partners to
extend our customer solutions. We partnered with Advanced Micro Devices, Inc.
(AMD) to bring Opteron processor-based x86 systems to our current line of
entry-level systems giving customers greater platform choice with maximum
price-performance. We also formed a strategic alliance with Fujitsu to
collaborate on the development, delivery and support of a future generation of
SPARC-based systems. This alliance is intended to strengthen the Solaris
footprint, drive increased market share for our enterprise class systems and
allow us to dedicate additional resources to throughput computing. In addition,
we expanded our partnership with Accenture LTD to advance our knowledge
management initiative, and we continued our relationship with Hitachi Data
Systems to provide high-end storage solutions and extend Sun's storage offering
into enterprise environments.
Our partner community is essential to our success. While our product and service
offerings are very broad, we recognize that no single supplier of computing
solutions can meet all of the needs of all of its customers. We have established
relationships with leading independent software vendors, value-added resellers,
OEMs, channel development providers, independent distributors, computer systems
integrators and service delivery partners to deliver solutions that our
customers demand. Through these relationships, our goal is to optimize our
ability to be the technology of choice, the platform of choice, the partner of
choice and to provide the end-to-end solutions that customers require to
compete.
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Services
We develop technology to solve complex network computing problems and we provide
expertise through a broad range of global services including Support services,
Professional services and Knowledge (formerly known as Educational) services
which enable our customers to architect, implement and deploy systems within
their IT environments. Combined with Sun Preventive Services introduced in
fiscal 2004, these offerings provide a full range of system/network
architecture, implementation and management as well as consulting, skills
migration and training.
SALES, MARKETING AND DISTRIBUTION
Our Global Sales Organization manages and has primary responsibility for our
field sales, relationships with our selling partners, technical sales support,
sales operations and delivery of professional services. We sell end-to-end
networking architecture platform solutions, including products and services, in
most major markets worldwide through a combination of direct and indirect
channels. We also offer component products such as central processor unit (CPU)
chips and embedded boards on an OEM basis to other hardware manufacturers and
supply after-market and peripheral products to their end-user installed base,
both directly and through independent distributors and value-added resellers. In
addition, our strategic alliance with Fujitsu will provide expanded distribution
of both companies' existing SPARC product lines.
Our sales force serves the telecommunications, government, financial services,
manufacturing, education, retail, life sciences, media and entertainment,
transportation, energy/utilities and healthcare industries. In fiscal 2004, we
organized our sales coverage within four timezone groups, which consisted of
U.S., International Americas (Canada and Latin America), EMEA (Europe, Middle
East and Africa) and APAC (Asia, Australia and New Zealand). Beginning in fiscal
2005, our sales coverage resources will be organized within 15 geographically
established markets. We have approximately 130 sales and service offices in the
United States and an additional 100 sales and service offices in 46 other
countries. We employ independent distributors in over 100 countries. In general,
our sales coverage model calls for independent distributors to be deployed in
partnership with our direct sales force. However, in some smaller markets,
independent distributors may be our sole means of sales, marketing and
distribution.
Our relationships with channel partners are very important to our future
revenues and profitability. Channel relationships accounted for more than 63% of
our total net revenues in fiscal 2004 and more than 61% of our total net
revenues in fiscal 2003. Our sales force is compensated on a channel-neutral
basis to reduce potential conflict between our sales force and channel partners.
Our channel partners include:
• Systems integrators, both government and commercial, who serve the
market for large commercial projects requiring substantial analysis,
design, development, implementation and support of custom solutions;
• Channel development providers who supply our products and provide
product marketing and technical support services to our smaller
resellers;
• Resellers who provide added value in the form of software packages,
proprietary software development, high-end networking integration,
vertical integration, vertical industry expertise, training,
installation and support;
• OEMs who integrate our products with their hardware and software; and
• Independent distributors who primarily serve foreign markets in
which we do not have a direct presence.
Additionally, ISV partners help us maximize our technology footprint by
integrating their software products with our platforms and technologies.
We have a wide range of marketing activities. Our Worldwide Marketing
Organization oversees Sun's marketing planning, determines product and pricing
strategy; coordinates advertising, demand creation and public relations
activities; maintains strategic partnerships with major independent software
vendors and performs competitive analyses.
Although our sales and other operating results can be influenced by a number of
factors, and historical results are not necessarily indicative of future
results, our sequential quarterly operating results generally fluctuate downward
in the first and third quarters of each fiscal year when compared with the
immediately preceding quarter.
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Revenues from outside the United States were approximately 57% of our total net
revenues in fiscal 2004 and 56% and 53% of our total net revenues in fiscal 2003
and 2002, respectively. Direct sales we make outside of the United States are
generally priced in local currencies and can be subject to currency exchange
fluctuations. The net foreign currency impact on total net revenues and
operating results cannot be precisely measured because of the various hedging
strategies we employ. However, because of the general weakening of the U.S.
dollar, our best estimate of the foreign exchange benefit approximated 4% of
total net revenues for fiscal 2004.
The countries primarily contributing to our international sales are the United
Kingdom (UK), Germany and Japan. The UK represented approximately 8% of our
total net revenues in fiscal 2004, 7% of our total net revenues in fiscal 2003
and fiscal 2002. Germany represented approximately 8% of our total net revenues
in fiscal 2004 and fiscal 2003 and 7% of our total net revenues in fiscal 2002.
Japan represented approximately 7% of our total net revenues in fiscal 2004, 8%
of our total net revenues in fiscal 2003 and 8% of our total net revenues in
fiscal 2002.
Some of our sales to international customers are made under export licenses that
must be obtained from the United States Department of Commerce. In addition, all
of our export transactions are subject to U.S. export control laws, and certain
transactions could require prior approval of the U.S. Department of Commerce.
Protectionist trade legislation in either the United States or other countries,
such as a change in the current tariff structures, export compliance laws or
other trade policies, could adversely affect our ability to sell or to
manufacture in international markets. Furthermore, revenues from outside the
United States are subject to inherent risks, including the general economic and
political conditions in each country.
Sales to General Electric Company (GE) and its subsidiaries in the aggregate
accounted for approximately 14%, 11% and 12% of our fiscal 2004, 2003 and 2002
total net revenues, respectively. More than 90% of the revenue attributed to GE
was generated through GE subsidiaries acting as either a reseller or financier
of our products. The vast majority of the revenue included in the amounts above
is from sales through a single GE subsidiary comprised 11%, 9% and 8% of total
net revenues in fiscal 2004, 2003 and 2002, respectively. This GE subsidiary
acts as a distributor of our products to resellers who in turn sell those
products to end-users. Our business could be adversely affected if GE or another
significant customer terminated its business relationship with us or
significantly reduced the amount of business it did with us. See Note 16 to the
Consolidated Financial Statements for additional information concerning sales to
international customers and business segments.
Our product order backlog at June 30, 2004 was $710 million, as compared with
$705 million at June 30, 2003. Our backlog includes orders for which a delivery
schedule within six months has been specified by the customer and shipped
products for which revenue has not been recognized. Backlog levels vary with
demand, product availability and our delivery lead times and are subject to
significant decreases as a result of, among other things, customer order delays,
changes or cancellations. As such, backlog levels may not be a reliable
indicator of future operating results.
WORLDWIDE OPERATIONS
The Worldwide Operations organization manages company-wide purchasing of
materials used in producing Sun products, assists in product design
enhancements, oversees our own manufacturing operations and those of our
manufacturing partners and coordinates logistics operations. Our manufacturing
operations consist primarily of final assembly, test and quality control of
enterprise and data center systems. For all other systems, we rely on external
manufacturing partners. We manufacture primarily in Oregon and Scotland and
distribute from California, the Netherlands and Japan. We have continued efforts
to simplify the manufacturing process by reducing the diversity of system
configurations offered and increasing the standardization of components across
product types. In fiscal 2004, we implemented a new customer fulfillment
architecture that enables us to ship some products directly from our suppliers
to our customers reducing cost and complexity in the supply chain. In addition,
we have continued to increase our focus on quality and processes that are
intended to proactively identify quality issues. The early-identification of
products containing defects in engineering, design and manufacturing processes,
as well as defects in third-party components included in our products could
result in delays of product shipments.
We depend on many suppliers for the necessary parts and components to
manufacture our products. There are a number of vendors producing the parts and
components that we need. However, there are some components that can only be
purchased from a single vendor due to price, quality, or technology reasons. For
example, we depend on Texas Instruments for our SPARC microprocessors and
several other companies for custom integrated circuits. If we were
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unable to purchase the necessary parts and components on acceptable terms from a
particular vendor and we had to find a new supplier for such parts and
components, our new and existing product shipments could be delayed, adversely
affecting our business and operating results. Similarly, our ability to purchase
components in sufficient quantities to meet customer demand could impact our
future operating results. Further, we also face the risk of ordering too many
components, or conversely, not enough components, because orders are generally
based on forecasts of customer orders rather than actual orders, which subjects
us to inventory risk.
RESEARCH AND DEVELOPMENT
Our research and product development programs are intended to sustain and
enhance our competitive position by incorporating the latest worldwide advances
in hardware, software, graphics, networking, data communications and storage
technologies. In addition, we may extend our product offerings and intellectual
property through acquisitions of businesses or technologies or other
arrangements with our partners. Sun's product development continues to focus on
enhancing the performance, scalability, reliability, availability and
serviceability of our existing systems and the development of new technology
standards. Additionally, we remain focused on system software platforms for
Internet and intranet applications, telecommunications and next-generation
service provider networks, developing advanced workstation, server and storage
architectures. We devote substantial resources to software development as we
believe it provides and will continue to provide significant competitive
differentiation.
We conduct research and development principally in the United States, United
Kingdom, France, Ireland, Germany, Japan, Norway and India. Research and
development (R&D) expenses were $1,926 million, $1,837 million and $1,832
million in fiscal 2004, 2003 and 2002, respectively.
PRODUCTS
Our products consist of Computer Systems and Network Storage systems.
COMPUTER SYSTEMS
Our Computer Systems products and technologies, including our full line of
scalable workgroup and enterprise servers, our UltraSPARC microprocessors and
our software, are integrated systems designed, developed and produced for
network computing environments.
Servers. We offer a full range of servers from our data
center/high-performance computing servers through our entry servers and blade
systems.
Data Center servers. Our data center servers, including the Sun Fire™ E25K,
Sun Fire E20K, Sun Fire 15K and the Sun Fire 12K, are designed to offer greater
performance and lower total cost of ownership than mainframe systems and are
used for server consolidations, application migrations, data mining and
warehousing, custom applications, on-line transaction support, enterprise
resource planning, high performance technical computing and databases. The Sun
Fire E25K server is one of the most scalable UNIX platform-based systems in the
marketplace and incorporates our UltraSPARC IV microprocessor, bringing
dual-threaded capability to the datacenter.
Enterprise servers. Our enterprise servers, including Sun Fire E6900, Sun
Fire E4900, Sun Fire E2900, Sun Fire 6800, Sun Fire 4800 and Sun Fire V1280
servers, provide reliability, availability and scalability to address the needs
of data centers and enterprise-scale network computing at a moderate cost. These
servers are available with various options in processor and memory
expandability, hardware redundancy and component accessibility and run on the
Solaris Operating System. In fiscal 2004, we introduced the Sun Fire E2900, Sun
Fire E4900 and Sun Fire E6900 servers which use the UltraSPARC IV processor and
are built to deliver dual-threaded capability and fault management technology
into our family of mid-range Sun Fire servers.
Entry server systems. We also offer an expansive line of entry server systems
differentiated by their size, their processor architecture (SPARC or x86), their
form factor (rackable or stand-alone systems) and the environment for which they
are targeted (general purpose or specialized systems).
Entry SPARC-based systems include our Sun Fire V880 and Sun Fire V480 servers,
Sun Fire V240 and Sun Fire V210 that deliver network computing in a compact,
low-cost package.
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Entry x86-based systems, including the Sun Fire V60x and Sun Fire V65x, provide
high density, cost effective scalable solutions for both Solaris and Linux
operating systems. During fiscal 2004, we introduced Sun Fire V20Z AMD
Opteron-based server and V20Z Compute Grid Rack System to expand the x86 entry
server line.
Our blade systems continue to combine high density hardware architecture and
system management software. They allow for management of a pool of
heterogeneous, modular, single board servers, such as SPARC and x86
architectures, Solaris and Linux operating systems and specialty blades, as one
computing environment.
Desktops and Workstations. Our desktops and workstations provide powerful
solutions for a wide range of business and technical activities such as software
development, mechanical design, financial analysis and education. Our product
line includes high performance 64-bit workstations, graphics accelerator boards,
newly released x86-based workstations and thin Sun Ray™ Ultra-Thin Client
products. In fiscal 2004, we introduced Sun Blade ™ 2500, 2000 and 1500
workstations for demanding graphics, visualization and compute applications.
Additionally, we released the Sun Blade W1100z and Sun Blade W2200z, which are
Sun's first x86 based workstations. We recently introduced the AMD Opteron-based
workstations that support Linux (Red Hat and SuSe, 32-Bit and 64-Bit) and the
Solaris Operating System (32-Bit and eventually 64-Bit) and are intended to be
Microsoft certified.
Processor and Network Products. The UltraSPARC microprocessors provide the
computing power of most of Sun's systems. We have three series of processors
that use the SPARC architecture: 1) The UltraSPARC s-Series processors power
the high-end and midrange server products from Sun, as well as power desktops,
and offer our highest level of performance, scalability and leading-edge
reliability, availability and serviceability (RAS); 2) The UltraSPARC i-Series
processors offer a higher level of integration on the central processing unit
enabling the price and performance design points deployed in Sun's workgroup
servers, rack mount servers and high performance desktops; and 3) The
UltraSPARC e-Series processors balance cost, power consumption and performance,
enabling economical 64-bit server and desktop solutions while maintaining binary
compatibility with all SPARC processors, past and present. In addition, our
networking and security products consist of a range of connectivity and
encryption products to improve network performance and security.
Software. Our software offerings consist primarily of enterprise
infrastructure software systems, software desktop systems, developer software
and infrastructure management software.
Solaris Operating System (OS). The Solaris OS is a high performance, highly
reliable, scalable and secure operating environment for SPARC and x86 platforms
that is easy to install and use, is optimized for the Java platform and supports
more than 12,000 applications. It is optimized for enterprise computing,
Internet and intranet business requirements, powerful databases and high
performance technical computing environments. The Solaris 9 OS, our latest
release of the Solaris OS, creates a services platform by combining traditional
operating systems functionality with application services and identity
management (management of user identities over the Internet or complex corporate
networks so that users can use a single sign-on to be authenticated and
authorized to access multiple files). Solaris 9 OS integrates with the Java
Enterprise System making it easier to build and deploy applications and web
services based on Java and XML technologies. Our Trusted Solaris™ OS provides a
high level of privacy and reduces the risk of security violations on a
commercial-grade OS. Trusted Solaris OS is available for both SPARC and x86
platforms.
Java technology. Our Java platform application environment allows development
of application software independent of the underlying operating system or
microprocessor. Java technology allows a developer to write applications once
for a wide range of platforms and devices. Our Java platforms are based on a
common core architecture and include the Java 2 Platform, Standard Edition
(J2SE™) technology used on personal computers and workstation clients and
available on Solaris OS, Linux, HP-UX, AIX, Tru64 Unix, Windows, MacOS X and
other platforms; Java 2 Platform, Enterprise Edition (J2EE™) technology used to
develop and deploy web services which enable secure, robust and interoperable
business applications; Java 2 Platform, Micro Edition (J2ME™ ) technology, which
extends Java technology to consumer and embedded devices such as mobile phones,
personal digital assistants (PDAs), digital set top boxes and residential
gateways; and Java Card™smart card technology.
Sun Java Studio Developer tools. We develop and market software development
tools designed to aid in application development and integration. The Java 2
Software Development Kit enables developers to create and run both applets
(miniature applications written in the Java programming language) that run
inside a web browser and applications that
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run outside of a browser. Our Sun Java Studio Developer Platform provides a
desktop-to-mainframe development and test environment for programming in C, C++
and Java programming languages.
Sun Java Enterprise System. Our Sun Java Enterprise System software enables
enterprises to utilize their information and applications into services offered
on intranets and the Internet. The Java Enterprise System software is an
integrated suite of most of our infrastructure software, including application,
directory, identity, integration, calendar, messaging and portal services for
multiple platforms.
Sun Java Desktop System. Our desktop software includes all the key components
of a user's environment, ranging from the user interface and desktop utilities
to a browser, multimedia capabilities and the StarOffice™ personal productivity
suite. The StarOffice office productivity suite has a fully integrated set of
applications including word processing, spreadsheet, graphic design,
presentations, database access, HTML editor, mail/news reader, event planner and
formula editor tools. It runs on most major operating environments and
platforms, including the Solaris OS, Microsoft Windows, Linux, OS/2 and Java
platforms.
N1 ™ Grid System. N1 Grid software is our vision and architectural blueprint
for reducing the cost and complexity of managing enterprise data centers by
allowing a data center to work like a single system by combining an enterprise's
IT resources (e.g. servers, storage and network devices) with virtualization,
provisioning, policy and automation, and monitoring.
NETWORK STORAGE
Our Network Storage systems integrate servers, storage and software to support
heterogeneous environments.
Storage Systems. Our high-end data storage systems provide a platform for
direct attach storage or storage area network (SAN) solutions. They are designed
for extreme availability, performance, scalability, connectivity and
manageability. Our high-end data storage systems, including the Sun StorEdge™
9980 and Sun StorEdge 9970, combine Hitachi Data Systems' (HDS) high-end storage
products with our resource management and file management software under an OEM
agreement with HDS first signed in fiscal 2002.
We offer a wide range of flexible, scalable mid-range storage systems, including
the Sun StorEdge 6320, Sun StorEdge 6120, Sun StorEdge 3910, Sun StorEdge A5200
Array and Sun StorEdge T3 Array, which support high-performance computing and
enterprise SAN implementations, as well as storage virtualization technology. In
fiscal 2004, we introduced the Sun StorEdge 6920 system, offering storage
virtualization which delivers performance, flexibility and high availability for
clustered environments such as high-performance computing and decision support
systems.
Our Sun StorEdge products for workgroup applications, including the Sun StorEdge
3510 and 3511 Arrays, the Sun StorEdge 3310 Array, Sun StorEdge 3120 Array, Sun
StorEdge S1 Array, Sun StorEdge D2 Array, Sun StorEdge A1000 and Sun StorEdge T3
Array for workgroup, offer a flexible, compact, cost-effective approach for
growing storage demands. Their building-block architecture is designed to allow
users to expand and customize as needed, offering performance and flexibility at
low cost for a variety of environments for increased return on investment.
Storage Software. Our Sun StorEdge software is an integral part of our
complete storage solutions. Our Sun StorEdge software is based on the Sun Java
System architecture and comprises an open, integrated and automated storage
management software family. The Sun StorEdge software suites are focused on
availability, utilization, performance and storage resource management.
SERVICES
Our services team provides expertise in helping our customers deploy network
computing environments through a broad range of services comprised of Support
services (support for hardware and software) and Professional and Knowledge
services. Sun Services assists customers globally, provides support services to
nearly 800,000 units under contracts in more than 100 countries, training
approximately 400,000 students annually and providing consulting, integration
and operations assistance to IT organizations worldwide.
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SUPPORT SERVICES
The SunSpectrumSM Support services product offerings allow customers the power
and flexibility to customize their support services contracts. Customers can
choose from four levels of support that range from mission critical to
self-support. This service is sold separately or packaged with hardware,
software and peripherals as a single-price support service. Each contract type
is specifically designed to enable high availability and continuous operation
for our customers. Our resources in the field for services delivery are
complemented by third-party service providers who primarily deliver hardware
support services such as spares inventories and manpower. Investments by these
third-party service providers help us expand our geographic coverage without
additional fixed cost investments on our part. Software support is primarily
delivered by our software support engineers.
We are in the process of growing our managed customer services. These fully
managed services comprise packaged services providing risk assessment,
mitigation and measurement toward availability improvement for customers. They
also enable businesses to shift their operational focus from non-core competency
IT management functions to running their business for competitive advantage.
During fiscal 2004, we released site support services, fully managed services,
Sun Preventive Services and our developing utility computing capabilities.
PROFESSIONAL AND KNOWLEDGE SERVICES
Sun's Professional services provides a suite of technical consulting and systems
integration services to help customers architect, implement, and manage complex
network computing environments. Our highly trained Professional services team
specializes in providing customers with advanced systems, software, storage and
network architecture design consulting, platform integration, enterprise systems
management and operation such as network security and identity management,
wireless network-based systems and advanced Sun Java System software integration
solutions. We provide people, processes and technology and we partner with
third-party systems integrators, to deliver solutions tailored to meet our
customers' needs. Our technical and project management experts help design IT
architectures and plan migrations from legacy systems to network computing or
help customers upgrade existing network computing environments. Additionally, to
keep customer computing environments operating at peak performance, operations
experts help customers manage the complexity of heterogeneous systems and
networks.
Our Knowledge services group develops and delivers integrated learning solutions
for enterprises, IT organizations and individual IT professionals. These
solutions help ensure that the necessary talent is available and properly
aligned to meet our clients' network computing needs, as well as business
objectives. Sun learning solutions include education consulting services,
learning management technologies, multi-mode learning content and professional
certifications.
COMPETITION
We compete in the computer hardware, software and services markets. These
markets are intensely competitive. Our competitors are some of the largest, most
successful companies in the world. They include International Business Machines
Corporation (IBM), Hewlett-Packard Company (HP), EMC Corporation (EMC), Fujitsu
Limited (Fujitsu) and the Fujitsu-Siemens joint venture. We also compete with
systems manufacturers and resellers of systems based on microprocessors
manufactured by Intel Corporation (Intel) and the Windows family of operating
systems software from Microsoft Corporation (Microsoft). These competitors
include Dell Inc. and HP, in addition to Intel and Microsoft.
Customers make buying decisions based on many factors, including, among other
things, new product and service offerings and features; product performance and
quality; availability and quality of support and other services; price;
platform; interoperability with hardware and software of other vendors; quality;
reliability security features and availability of products; breadth of product
line; ease of doing business; a vendor's ability to adapt to customers' changing
requirements; responsiveness to shifts in the marketplace; business model (e.g.,
utility computing, subscription based software usage, consolidation versus
outsourcing); contractual terms and conditions; vendor reputation and vendor
viability. We believe competition has continued to remain intense over the last
fiscal year. In this environment, each factor on which we compete is critical
and the lack of competitive advantage with respect to one or more of these
factors could lead to a loss of competitive position resulting in fewer customer
orders, reduced revenues, reduced margins, reduced levels of profitability and
loss of market share.
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We have encouraged the use of SPARC technology as a standard in the computer
marketplace by licensing much of the technology and promoting open interfaces to
the Solaris OS, as well as by offering microprocessors and enabling technologies
to third party customers. As a result, several licensees, including Fujitsu and
the Fujitsu-Siemens joint venture company, also offer products based on the
Solaris OS and the SPARC architecture that compete directly with our products.
We have also worked to make our Java programming language a standard for complex
networks. We develop applications, tools and systems platforms, as well as work
with third-parties to create products and technologies, in order to continue to
enhance the Java platform's capabilities. As part of this effort, we license
Java technology which widely encourages competitors of Sun to also develop
products competing with these applications, tools and platforms. If we are
unable to compete effectively, our business could be harmed.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY LICENSES
We have used, registered or applied to register certain trademarks and service
marks to distinguish genuine Sun products, technologies and services from those
of our competitors in the U.S. and in foreign countries and jurisdictions. We
enforce our trademark, service mark and trade name rights in the U.S. and
abroad.
We hold a number of U.S. and foreign patents relating to various aspects of our
products and technology. While we believe that patent protection is important,
we also believe that patents are of less competitive significance than factors
such as innovative skills and technological expertise. From time to time we have
been notified that we may be infringing certain patents or other intellectual
property rights of others. Several pending claims are in various stages of
evaluation. With the exception of the matters further disclosed at Item 3. Legal
Proceedings of this report, we believe no material litigation has arisen from
these claims. We are evaluating the desirability of entering into licensing
agreements in certain of these cases. Based on industry practice, we believe
that any necessary licenses or other rights could be obtained on commercially
reasonable terms. However, no assurance can be given that licenses can be
obtained on acceptable terms or that litigation will not occur. The failure to
obtain necessary licenses or other rights, or litigation arising out of such
claims, could adversely affect our business.
EMPLOYEES
As of September 2, 2004, we had approximately 32,600 employees. We depend on key
employees and face competition in hiring and retaining qualified employees. Our
employees are vital to our success, and our key management, engineering and
other employees are difficult to replace. Although we have entered into a
limited number of employment contracts with certain current and former executive
officers, we generally do not have employment contracts with our key employees.
Further, we do not maintain key person life insurance on any of our employees.
As our stock price has decreased and because we offer equity-based incentive
compensation, our ability to continue to offer competitive compensation packages
to current employees has been negatively impacted. Consequently, these pressures
have affected our ability to attract and retain highly qualified personnel. If
these adverse conditions continue, we may not be able to retain highly qualified
employees in the future and this could harm our business.
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