Sun Storage Slumps

Even in a quarter when Sun Microsystems Inc. (Nasdaq: SUNW) staged a mini-comeback, storage remained a laggard.

Sun posted a 3.6 percent overall revenue gain from last year, yet storage revenues dropped 9 percent from last year and 25 percent from the previous quarter to $322 million (see Sun Posts Q1 Results). Storage attach rate the amount of storage gear sold with servers – fell from 26 percent to 24 percent, which is about half the industry average for server companies that sell storage.

To explain the storage slump, Sun CEO Scott McNealy fell back on the old, built-in excuse – product transition. The company recently launched a bunch of new storage products that have just begun or will soon begin shipping. The jewel of its rollout is a high-end system, which is actually the Hitachi Data Systems (HDS) TagmaStore system that Sun resells. Sun is also coming out with a midrange SAN system, low-end SATA system, and a NAS offering (see Sun Sings New Storage Song, Sun Expands Storage, and Hitachi Struts Mr. Universal).

The theory is, customers won't buy old stuff when new stuff is on the way. "We're in the midst of a kind of a buildout again of our storage product line," McNealy told analysts in a conference call. "If it is a quarter in which there were a bunch of storage announcements, I think there was probably some impact to those announcements on the sales cycle."

But Sun wasn't exactly making a killing before entering its product transition. According to research firm IDC, Sun's share of the external storage market in the second quarter of 2004 fell to 8.1 percent from 8.9 percent in the previous year. Sun ranked fourth, behind EMC Corp. (NYSE: EMC), Hewlett-Packard Co. (NYSE: HPQ), and IBM Corp. (NYSE: IBM).Storage analysts have generally been upbeat about Sun's new products, probably because it had been such a long time since the company generated any excitement around its storage. Financial analysts take a more cautious approach about how much the rollouts will help.

"We expect Sun's high-end storage sales to see some boost in the December quarter, when it begins reselling Hitachi's TagmaStore," wrote Fulcrum Global Partners LLC analyst Robert Cihra today in a research note. "Though more broadly, we think Sun still has much work cut out for it in storage, with gaps still left to fill and a sometimes less-than-compelling platform vs. ultra-stiff competition."

— Dave Raffo, Senior Editor, Byte and Switch