Dueling Fools

Dueling Fools
Sun Shines?
February 17, 1999

Sun Bull's Pen
by Chris Rugaber (tmfrfk@aol.com)

One of the many amusing things about that cheesy alien-invasion movie Independence Day was the scene where Jeff Goldblum's Macintosh laptop computer connected to the alien mother ship's computer network, enabling him to upload a virus and disrupt their entire system, thereby foiling their nefarious plans to invade Earth. (Apparently the aliens hadn't yet developed anti-virus software.)

At the time, I thought how ridiculous it all was: a Macintosh laptop can barely even communicate with an American-built, English language-based "Wintel" PC, much less an alien computer from 90 million light years away! I shouldn't have been surprised, though. Hollywood has always seemed to believe that all computers can talk to each other all the time.

Well, get ready for this formerly fantastical notion to become reality. Thanks to Sun Microsystems' (Nasdaq: SUNW) new, revolutionary Jini (pronounced genie) technology, the idea that all computers can talk to each other all the time may soon become as commonplace and everyday as a working telephone.

In fact, Jini technology will connect a lot more than just computers. Everything from cell phones to stereo systems to more mundane household appliances such as dishwashers could, in the near future, be linked over household networks and perhaps the Internet itself to any number of other networked appliances. Want to turn up the heat in your house before you leave work for the day? Log onto the Internet and adjust your thermostat. Want to set the stereo to play a particular song just as your spouse or significant other gets home? No problem.

The applications of this kind of technology are potentially limitless. As Fortune magazine wrote, "Say you carry a Jini-enabled [personal digital assistant] when you go to the airport� it might alert wireless systems that you've arrived, confirm your seat assignment, and receive and display your gate and departure information. Automatically." Let's consider another example, from CEO Scott McNealy's 1998 letter to shareholders: "Imagine being able to access your personal desktop from any computer -- just by swiping a smart card at an airport computing kiosk, a hotel set-top box, or a client's workstation -- anywhere you happen to be." Now that is pretty cool, even if it will make getting away from work a little harder.

This is not just pie-in-the-sky daydreaming, either. Germany's Bosch Siemens is already planning to use Jini in a dishwasher, which will enable company technicians to remotely diagnose problems with the appliance. Kinko's wants to set up a system where customers could have documents print out in other Kinko's stores in different cities. In fact, 37 companies announced they were licensing Jini the day Sun formally introduced it, ranging from Sharp to Cisco to Eastman Kodak to Xerox.

Sun is a lot more than just its newest technology, however. The company also created Java, which enables programmers to develop applications that will run on any Java-enabled platform, regardless of its underlying architecture. Java, Jini, and the earlier programming language known as Unix, which runs most of the Internet's server computers, were either developed or significantly enhanced under the supervision of Sun's co-founder and Chief Technology Officer Bill Joy. While that other software company, Microsoft (Nasdaq: MSFT), cranks out applications millions of lines long, slapping obscure fonts like Zapf Dingbats into its word processing programs and calling the resulting bug-ridden bloatware "innovative," Sun has imagined the future and is moving to implement it.

While Jini will need to be ubiquitous in order to really be effective, and therefore licensed for a nominal fee (when not given away for free), Sun can still potentially make a lot of money from it. The company's experience with Java demonstrates that it can leverage its software into lucrative, high-margin hardware sales.

For example, when Sony wanted to set up an integrated supply management chain, the multinational corporation used Java-enabled software to link a wide range of computers throughout its far-flung operations. Integration was possible without having to buy tremendous amounts of new hardware, but Sony did need some new Sun servers to help tie everything together. (For the whole blatantly corporate-boosting story, click here). In fact, with all the talk about its software, Sun's hardware -- primarily its servers and workstations -- generate most of the company's $10 billion annual revenue, and the company continues to increase its sales of those high-end products. As the Internet's ubiquity increases and e-commerce becomes a standard, commonplace way of doing business, Sun will benefit as much as companies like Cisco (Nasdaq: CSCO) and EMC (NYSE: EMC).

For example, its deal with America Online and Netscape will enable the company to become a one-stop e-commerce shop. Its hardware and software are already used by companies like Amazon.com and Kaiser Foundation Health Plan, the nation's largest HMO, to implement and manage their internal and external networks. Netscape's e-commerce and browsing technologies will be perfect complements.

Nevertheless, Sun has more than just neat technology. It also has some solid financials. In fact, you could argue that Sun has the best of both worlds: Bill Joy as the visionary and CEO McNealy as the hands-on, practical executive that gets things done. Sun's revenue has grown at an average annual rate of 26% per year for the last ten years, its net income has grown at a 32.8% clip over the same period, and its earnings per share (EPS) have jumped 28.6%. Pretty impressive given the quickly changing nature of the computing industry during that time.

The company also makes efficient use of its capital, with 1998 return on equity and return on invested capital at about 24%. It has increased its gross margins in the last three years from 45.7% to 53.8%, enabling it to spend larger amounts on research and development. R&D spending jumped 22% from 1997 to 1998 -- faster than revenues -- and continued to increase in the first six months of Sun's fiscal year 1999 (which will end this June 30th). Finally, despite the $1 billion-plus that the company spends on R&D every year, Sun still adds plenty of cash to the balance sheet and now sits on over $1.5 billion.

Things look to continue in the right direction: revenue grew 16% the first half of the company's current fiscal year, and Sun expects the growth to jump to 20% for the second half. On top of that, the company has announced a business restructuring plan in order to reduce sales, general and administrative (SG&A) expenses by the equivalent of 3% of revenues, widening the company's operating margins and increasing profits.

With all this in mind, what desperate tactic can our Bear, Warren Gump, employ? Wring his hands about valuation? Well, we shall see about that...