Tuesday, February 24, 2009

The Rising Sun

I have been ruminating on Sun for a while, ever since Savio Rodriques' blog on Sun's software earnings last month. Last quarter, Sun's Java licensing generated $67M and MySQL generated $81M. Not even taking into account the 50% growth rates that these products are seeing, that is a $600M annual run rate.

As Matt Asay pointed out, Red Hat and Sun had virtually the same market cap for a bit, although Red Hat has since dropped. If you account for the cash that Sun has, Red Hat is actually worth a couple of billion more. Red Hat had $500M in revenue last year.

Contrary to Matt, I don't think these numbers are as exciting for Red Hat as they are for Sun. What is interesting is that if you look at the numbers only, Sun is now a software company. If Sun consisted only of its Java and MySQL groups, it would be a $600M/year commercial open source company that is worth, at the same multiple as Red Hat, $2.5B. When you take into account Sun's cash position, that is more than Sun is worth right now!

So yes, I was quoted in Forbes saying that Sun should jettison its Java group, and I have to take a mea culpa on that one now that I see that Sun is making over $300M/yr off of Java.

Sun is now a modern, open source software business, and a layer up above Red Hat at that. The hardware at this point is a channel for the software and will soon be rentable as a cloud offering. I imagine that Sun will continue to climb up the software stack and roll up SugarCRM, Alfresco, Jasper, and others.

Kudos to Jonathan Schwartz. It took a long time to redirect the lumbering ship, but he has done it. I think that soon enough the market will recognize this new, rising Sun as a counterbalance to Oracle's proprietary solutions. Congratulations!


Sacha L said...


I am amazed... How can you state that "if you look at the numbers only, Sun is now a software company"?!?

SUN has more than 12 BILLION in revenue (yes, that's a "B") and they are doing 600m in software?!? That's 5%!!! The boring and stagnating hardware business *is* paying for the bills at the end of the month, this is what allows SUN to invest funny money in new software, and for entire departments, without even monetizing it at any decent level.

Look at it the way you want. These are really two companies. The cash cow part has huge inertia but isn't growing and is facing big competition. The software part is growing but is far from being able to sustain its own weight.

It is a catch-22. The only question for Schwartz is: will the board give him enough time to convert this non-profitable 12B business in a profitable 600m business (it would have to be higher than 600m by that time, obviously)

I am not even touching on the topic of salesforce execution here.


JBoss, a division of Red Hat.

Doug said...

$12 Billion in revenue at somewhere near a 40% combined margin rate barely covers expenses, hence the layoffs and rumored pay cuts. Cost of hardware development and production are exponentially higher than in software which, as we can see with Microsoft, is extremely profitable. If JIS is actually able to sell the hardware part of JAVA, the remainder has quite a chance of surviving as a much smaller, profitable company.

Peter Yared said...

@Sacha, let me rephrase that, if you look at the numbers only, Sun is as much a software company as Red Hat JBoss! :)