Sun Microsystems, Inc.
Financial Statements Analysis
Muthu Subramanian K (2008319)
Table of Contents
1. Overview of the Industry..................................................................................................................1 2. Basic Company Information.............................................................................................................2 3. The company’s Economic, Social, Legal and Political Environment..............................................3 4. Overview of Annual Report..............................................................................................................3 5. The Company’s Independent Auditor...............................................................................................4 6. The Income Statement......................................................................................................................5 Summary..........................................................................................................................................5 Major Expenses................................................................................................................................5 Revenue details as Products(Computers & Storage) & Services(Support & Professional Services) .........................................................................................................................................................6 Margins............................................................................................................................................6 Revenue details: Geographic...........................................................................................................7 DuPont Analysis..............................................................................................................................7 Comparisons with other similar firms/competitors.........................................................................8 7. Current Assets and Current Liabilities.............................................................................................9 Summary..........................................................................................................................................9 8. Long Term Assets and Long Term Liabilities.................................................................................11 Summary........................................................................................................................................11 9. Stock holders Equity.......................................................................................................................12 Summary........................................................................................................................................12 EPS.................................................................................................................................................12 Oracle acquiring Sun Microsystems..............................................................................................12 10. Cash Flow Statement ...................................................................................................................13 Summary........................................................................................................................................13 Key Acquisitions in the recent past................................................................................................13 11. Summary Statement on Financial Health and Status of the Company.........................................14
1. Overview of the Industry
Sun Microsystems is one of the key players in the IT industry. It caters to hardware, software and services sector of the industry. Currently the key players in the industry include, Microsoft, Oracle, Dell, Hewlett-Packard, and Amazon.
Hardware industry includes the players manufacturing computer hardware, like servers, clients, boards, etc. The software industry includes softwares which carter to individuals as well as businesses. Services industry includes services like storage, web based services, R&D, etc. The IT industry faces with regular booms and busts.
The recent trends include higher adoption of Software as a Service and higher usage of open source alternatives. The industry is also moving towards virtualization technologies and usage of cloud computing. All these are because the customers want low cost, by cutting unwanted expenses and high availability alternatives to reduce maintenance costs.
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2. Basic Company Information Company Name: Sun Microsystems, Inc. Founded: 1982 Stock Ticker Symbol: JAVA Market capitalization (as in April 2009): $3.7 billion (at $4.97/share) Industry: Diversified Computer Systems (Computer Hardware, Software and Services) Employees: Approx. 33,3501 Key people: Scott McNealy, Chairman & Jonathan I. Schwartz, President and CEO Revenues (Year ended June 2008): $13,880 million Net income: $403 million Products: Hardware: Servers, Clients, Storage Solutions, Software: JAVA, Open Solaris, StarOffice, VirtualBox, Solaris Cluster, Sun One, … Services: Sun Modular Datacenter, Sofware as a Service (SaaS): Sun Grid, Zembly Sun Microsystems name was derived from the abbreviation of Stanford University Network. It was founded in February 1982. It was profitable from its first quarter in July 1982. Sun's initial public offering was in 1986. Sun Microsystems has a diversified set of products, ranging from hardware (like servers and storage solutions) to software (like Java and VirtualBox) to services (Zembly and Sun Grid). Sun initially started with servers and workstations for the growing network market. It was an early advocate of Unix based networked computers. Later it developed its own version of Unix variant called Solaris. Sun has been an early adopter of open source trends – it has opened the sources of many of its software products like Java2, Solaris3 and VirtualBox. Sun's competitors include Microsoft, Dell, HP, Oracle4, Amazon and IBM. Sun reported a profit of $403 million for the year ended June 2008 and revenues of about $13,880 million. Its net operating cash flows were around $1329 million. The stock was trading at $4.97 before Oracle (and IBM) announced intentions of buying Sun Microsystems. After the announcement5 the stock is trading at about $9.00 per share.
1 2 3 4 5
http://en.wikipedia.org/wiki/Sun_Microsystems http://slashdot.org/article.pl?sid=08/04/23/2037220 http://news.cnet.com/2100-7344_3-5745120.html Oracle has agreed to buy Sun for $9.50 per share. http://www.sun.com/third-party/global/oracle/
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3. The company’s Economic, Social, Legal and Political Environment. Sun Microsystems' JAVA was industry first. It was marketed as “Write once Run anywhere”. It was immediately adopted in many parts of the industry, including mobile platforms and web technologies. But in other newer technologies Sun either entered late or wasn't successful in pushing the technology. Sun servers can be considered as its cash cows. Sun, like many other IT companies, is facing with the challenge of recession, which forces companies to improve efficiency and create new, better and cheaper products. The industry as such is moving towards SaaS 6 and open source technologies. Sun is a player in both these segments. Existing players in the SaaS segment includes Amazon (EC2, S3, ..), Google and Microsoft. Existing players who provided services/products in the open source domain include Red Hat, Novell and Ubuntu. The users of these services see SaaS as a “pay-per-use” kind of service. They don't have to maintain, upgrade or repair these systems but only use the services provided by the SaaS provider. The users of open source technologies view it as secure, trust able and low cost. These are also the key advantages of the open source technology. Many companies who are pressurized to reduce costs and cut unnecessary expenditure look at these two technologies as key alternatives.
4. Overview of Annual Report The company is guided by the vision “The Network is the Computer”. Network computing platforms, provided by Sun, are used by nearly every sector of society and industry. For Sun, R&D is one of the key investments to sustain its operations. • • • • The revenues increased by about $7 million and the operating income increased by about $63 million over the previous year. US revenues decreased by about 8% or $443 million. Restructuring charges of about $263 million (as compared to $97 million for the previous year) were incurred The company repurchased 151 million shares at average price of $18.30 for a total cost of $2.76 billion under the stock repurchase plan.
The company follows a “Defined Benefit Pension Plans” policy. Changes in the company's expected long-term rate might materially impact the expense and liabilities or assets recognized association with its pension plans.
6 Software as a Service
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5. The Company’s Independent Auditor. Ernst & Young is the company's Independent auditing firm. They were paid more than $14 million as auditing fees for the year ended June 2008. Ernst & Young is a leading auditing firm with headquarters in London, UK. Its revenues for 2008 were close to $24.5 billion and has close to 135,000 employees around the world. The auditing firm conducted audits in accordance with the standards of the Public Company Accounting Oversight Board (USA). Those standards are mostly to get assurance about whether the financial statements are free of material misstatements. In their opinion, the financial statements are presented fairly and confirm to the US GAAP 7 for each of the three years of the period ended June 30, 2008. They also audited the internal control and expressed an unqualified opinion for the same.
7 Generally Accepted Accounting Principles.
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6. The Income Statement.
Summary Basic Income Statement Information Sales(total revenues) Cost of Goods Sold(CGS) Gross margin, profit or income Total other revenues, expenses, gains and losses other than (CGS) Income(loss) before taxes Income Taxes Net Income (loss) Comprehensive Income* Year ended 2008Jun 13880 7425 6455 5845 610 207 403 179
Major Expenses
Break of expenses COGS R&D Selling & General Admin Restructuring Impairment of goodwill Purchased in process R&D 2008 7425 1834 3955 263 0 31 2007 7608 2008 3851 97 0 0 2006 7439 2046 4039 284 70 60
16000 14000 12000 10000 8000 6000 4000 2000 0 2008 2007 2006
Purchased in process R&D Impairment of goodwill Restructuring Selling & General Admin R&D COGS
Sun Microsystems reduced R&D Expenses to a large extent in the past 2 yrs. It might be because it is acquiring other companies (like MySQL, StorageTek, etc). But, it will be difficult for the company if it does not come up with Business output from its R&D. The last major technology that Sun developed in house was Java. It has mostly bought other technologies/products like MySQL, StorageTek.
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Revenue details as Products(Computers & Storage) & Services(Support & Professional Services)
Products & Services Computers Storage Support Professional Services and Educational Services Total
2008 6264 2354 4023 1239 13880
2007 6455 2316 3962 1140 13873
2006 5997 2374 3678 1019 13068
7000 6000 5000 Computers 4000 3000 2000 1000 0 2008 2007 2006 Storage Support Professional Services and Educational Services
The revenues have more or less remained constant across these three years.
Margins
Gross margins Services Products Gross margins as Percentages Services Products 2008 2505 3950 2008 47.61% 45.83% 2007 2305 3960 2007 45.18% 45.15% 2006 2085 3544 2006 44.39% 42.34%
Even though the absolute values of gross margins for services is lesser, services is more profitable than products – as seen from the above tables. But for Sun Microsystems, the revenues from services might have a dependency on the products sold (and vice-versa).
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Revenue details: Geographic
Geographies US International Americas EMEA APAC
2008 5198 1002 5247 2433
2007 5641 863 4999 2370
2006 5535 755 4646 2132
2433 5198
US International americas EMEA APAC
1002 5247
About75% of revenues come from US and EMEA8, while 17.5% of revenues come from APAC9 and 7.5% comes from International Americas10. Clearly the APAC region has a large untapped potential. Sun Microsystems should concentrate more on the emerging markets such as India and China.
DuPont Analysis
ROE NetProfit = Equity NetProfit EBT EBIT Sales Assets = x x x x EBT EBIT Sales Assets Equity 403 610 417 13880 14340 = x x x x 610 417 13880 14340 5588 = 0.66 x 1.46 x 0.03 x 0.97 x 2.57 = 0.07
8 Europe, Middle East & Africa 9 Asia Pacific 10 Canada and Latin America
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Comparisons with other similar firms/competitors
Sun Net Income EBT EBIT Sales Assets Equity 403 610 417 13880 14340 5588 Microsoft HP 17681 23814 23676 60420 72793 36286 Dell 8329 10238 10473 118364 113331 38942 2478 3324 3190 61101 26500 4271 Novell -8.74 22.88 31.62 214.87 2269.35 1087.53 Oracle 5521 7834 7844 22430 47268 23025
NI/EBT EBT/EBIT EBIT/Sales Sales/Assets Assets/Equity ROE
0.66 1.46 0.03 0.97 2.57 0.07
0.74 1.01 0.39 0.83 2.01 0.49
0.81 0.98 0.09 1.04 2.91 0.21
0.75 1.04 0.05 2.31 6.2 0.58
-0.38 0.72 0.15 0.09 2.09 -0.01
0.7 1 0.35 0.47 2.05 0.24
Sun's ROE is just above Novell's. Among others HP and Oracle seem to have a similar ROE (close to 0.2). Dell's ROE is quiet good, this is because it has close to $28 billion worth of treasury stock. Among other parameters, Sun should look at improving is its margins/EBIT. Its EBIT seems to be quiet low when compared with other companies, this is because of higher selling and administrative expenses. All other parameters look more or less similar.
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7. Current Assets and Current Liabilities
Summary Current Assets Amount on Most Recent Balance Sheet Amount at Net change Net Change End of In Dollars in Percent Prior Year 3620 962 2964 524 200 1058 9328 1348 -533 55 156 16 160 -1494 -37.24 55.41 1.86 29.77 8 15.12 -16.02
Cash and cash 2272 equivalents Temporary assets(short 429
term investments or short term marketable securities)
Accounts receivable net Inventories Deferred taxes Prepaid Expenses Other-------Total Current assets
3019 680 216 1218 7834
Current Liabilities
Amount on Most Recent Balance Sheet 1387 734 2236 1105
Amount at Net change Net Change End of In Dollars in Percent Prior Year 1380 842 2047 961 1 220 5451 7 -108 189 144 -1 -14 217 0.51 -12.83 9.23 14.98 -100 -6.36 3.98
Accounts Payable Short-term debt Accrued Salaries and wages Deferred Revenues Accrued interest Current maturities of long-term debt Warranty Reserve Other---------Total current Liabilities
206 5668
The current assets have reduced while the current liabilities have increased. This decreases the working capital requirements from: $3877 million to $2166 million The current ratio is 1.38 (reduced from 1.71). This is because of cash and cash equivalents reducing 37% to $2272 million. Sun Microsystems Financial Statements Analysis,TAPMI 9
16% 29% 3%
9%
Cash and cash equivalents Temporary assets Accounts receivable net Inventories Deferred taxes Prepaid Expenses
The Accrued interest increased by 15% to $1105 million.
5%
39%
4% 24% 19%
Accounts Pay able Short-term debt Accrued Salaries and wages Def erred Rev enues Accrued interest Current maturities of long-term debt W arranty Reserv e
13%
39%
End of Most recent Year a. Sales revenue b. Gross accounts receivable c. Less allowances for bad debts d.Net accounts receivable e. Allowance for bad debts as a percentage of sales f. Allowance for bad debts as a percentage of ending accounts receivables 13880 3083 64 3019 0.46 2.12
End of Previous Year 13873 3045 81 2964 0.58 2.73
Percentage change 0.05 1.25 -20.99 1.86
Inventories are valued lower of cost (FIFO) or market price. Inventories in transit are included in finished goods (and are not included in revenues). Inventories, due to changing technologies, may be considered as obsolete and written off. Sun Microsystems Financial Statements Analysis,TAPMI 10
8. Long Term Assets and Long Term Liabilities.
Summary Long-term assets Amount on Most Recent Balance Sheet Amount at Net change Net Change End of In Dollars in Percent Prior Year 2716 1070 512 512 267 3573 -287 14 112 9 -45 -304 -10.57 1.31 21.88 1.76 -16.85 -8.51
Machinery and 2429 equipment Land, Building 1084 Capitalized Software 624 leasehold improvements 521 Furniture and Fixtures 222 Less: Accumulated depreciation Net Property, Plant and Equipment Long-term investment Excess of cost over net assets of acquired companies i.e. goodwill Patents, copyrights and trademarks Assets held for sale Other-------------Total long-term Assets 3269
1611 609 3215
1504 1360 2514
107 -751 701
7.11 -55.22 27.88
565 0 506 6506
633 29 470 6510
-68 -29 36 -4
-10.74 -100 7.66 -0.06
Goodwill forms a major chunk, about 50%, of the the assets of Sun Microsystems. We don't know how these will be valued by others, especially during the economic down turn. Sun's patents, copyrights and trademarks have shown a decreasing trend – Sun has not been successful in its R&D to create new technologies/patents of considerable value. The last such notable technology was JAVA software. With respect to the long term liabilities, Long term debt forms about 15% of the total long term liabilities. Sun paid about $47 million as interest for the year 2008 – i.e. about 4% interest rate.
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9. Stock holders Equity
Summary
Equity accounts
Net Change Amount on Amount at Most Recent End of in in Balance Sheet Prior Year Dollars Percent 0 7391 430 2726 0 6987 189 311 314 7179 0 404 241 2415 179 -1591 0 5.78 127.51 776.53 57.01 -22.16
Preferred stock Common stock Retained earnings Treasury stock
493 Accumulated other comprehensive income Total stockholders' equity 5588
The company bought back shares worth $3 billion in the year ended Jun 2008. The board of directors also approved of shares buy-back of another $1 billion. Part of this change can be seen in treasury stock increasing from $311 million to $2726 million. EPS The basic EPS is $0.50 per common share ($0.54 in the previous year), which the diluted EPS is $0.49 per common share ($0.52 in the previous year) Oracle acquiring Sun Microsystems On April 20, 2009, Sun and Oracle11 announced the agreement where Oracle agreed to buy Sun Microsystems for $9.50 per share in cash. The transaction is valued at about $7.4 billion. This is a good combination of software and hardware technologies. Oracle is one of the leading providers of ERP and database solutions. Sun is a leading provider of hardware for such systems. It is known for its storage and server solutions. We still can't say what would happen to solutions like MySQL, which Sun recently acquired for close to $1 billion. MySQL was a leading open source competitor for Oracle's SQL Server.
11 http://www.sun.com/third-party/global/oracle/
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10. Cash Flow Statement
Summary
2005 Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities Net Change in Cash
2000 1500 1000 500 0 -500 -1000 -1500 -2000 -2500 -3000 2005 2006 2007 2008 Cash f rom Operating Activities Cash f rom Investing Activities Cash f rom Financing Activities Net Change in Cash
2006 567 652 299 1518
2007 958 -1077 170 51
2008 1329 -66 -2611 -1348
279 -335 -34 -90
The key change in the year 2008, was a drastic increase in outflow for financing activities. This is mainly the stock buy-back. We can expect the same for year 2009 as well, since the board approved another $1 billion buy-back.
The cash flows from operating activities have increased at 38% over the previous year. The rate at which it has increased is following a decreasing trend. This may be because of the acquisitions done by Sun. Key Acquisitions in the recent past • • • • • • • April 2007 - SavaJe, developer of the SavaJe OS, a Java OS for mobile phones September 2007 - Cluster File Systems, Inc. November 2007 - Vaau, provider of Enterprise Role Management and identity compliance solutions February 2008 - MySQL AB, the company offering the popular open source database MySQL February 2008 - Innotek GmbH, developer of the VirtualBox virtualization product April 2008 - Montalvo Systems, failed x86 microprocessor startup acquired before first silicon January 2009 - Q-layer, a software company with cloud computing solutions
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11. Summary Statement on Financial Health and Status of the Company Sun's cash operating flows have shown a robust growth in the past few years. It has entered the competitive market of SaaS in the recent past and is gaining reputation by using the open source techniques. Sun's R&D Expenditure has been on the decline, it recently aborted few of its R&D efforts12. The last major in-house developed technology is JAVA, which is about 20yrs old (To a certain extent ZFS was also successful, though Sun Microsystems didn't push it enough). Sun clearly requires more R&D successes to continue successful further. The economic crisis might act favorable for Sun Microsystems, with more companies moving towards cheaper and better alternatives of Open source software and Software as a service models. Sun targets both of these markets with products such as Sun Cluster and Open Solaris. Sun Microsystems has also bought back quiet a large no. of shares (about $3 billion worth of shares in the past one year). This has also caused the cash balances of the company to go down by more than 37% in the past one year. This could have been a strategy to probably help the potential buyers (of Sun Microsystems). Oracle agreed to buy Sun Microsystems for $9.50 per share, valuing the transaction at $7.4 billion. This moved the share prices of Sun Microsystems up by almost 100% (from about $4.5 to $9 per share). Oracle, whose core products were the software solutions for database systems, completes its product portfolio by offering the hardware severs for such softwares (which it would acquire from Sun Microsystems). Sun's margins need a drastic improvement, but it fairs well (or better) with respect to the other parameters of financial analysis (ratios, …), when pitted against companies which are considered its competitors (like Dell, Novell and HP). Sun Microsystems is a good company to invest in for the short run – expect $9.50 per share in the short term as returns. For the long run, unless Sun does magic in the SaaS, Open source and other services, expect mediocre or bad performance. And of course long term loans would be termed risky. But, yes, Oracle and Sun combination is all together a different ball game.
12 Like the parallelization in instruction level execution in SPARC processors.
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