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Can Fujitsu Make Sun Shine Again?

By Jim Kerstetter Sun Microsystems (SUNW), mired in a three-year slump, is finally turning to its business partners for help. On June 1, Sun announced that it will merge its core product line with Japanese computer maker Fujitsu's (FJTSY) similar line by 2006. "This is all about choice," Sun CEO Scott G. McNealy said at a press conference announcing the partnership.

Maybe for customers, but McNealy has little choice. Reluctant to make big cuts in the past, he now says he's seriously looking for ways to get costs down. In Sun's most recent quarter, which ended in March, the outfit had a $750 million net loss on $2.6 billion of total sales. It was the 12 consecutive quarter of declining year-over-year revenues.

HEAVY RESEARCH COSTS. McNealy's cost-cutting goal, he now says, is to get Sun's operating expenses down to $4.7 billion. To get a sense of how big the challenge will be, that amount is about $300 million less than what analysts expect Sun to spend in the fiscal year that closes at the end of this month. While McNealy didn't provide many details on how the partnership will work and the savings it will provide, he made it clear it will help Sun meet those aggressive cost-cutting goals. "This will definitely make the investment dollars go further," he says.

How? For years, Sun has carried the biggest research-and-development load among top computer manufacturers. At 17.3% of total sales, Sun's R&D budget dwarfs those of streamlined competitors like Dell (DELL), which spends just 2% of total sales on R&D. Sun spends so much because it designs its own chips, computer systems, and software. The outfit doesn't break down its R&D spending, but analysts estimate the Silicon Valley computer maker spends an estimated $400 million per year just on development of its SPARC microprocessors. The biggest R&D item is software, which takes up about half of Sun's R&D budget.

Fujitsu is a natural development partner for Sun. The two companies have worked together since shortly after Sun was founded in 1982. It co-developed with Sun the first line of servers based on the SPARC processors. Now it's the one major computer manufacturer that sells machines based on Sun's SPARC chips and Solaris operating system. Depending on the level of the companies' cooperation, Sun could save $300 million to $400 million per year, according to earlier estimates by Sanford Bernstein analyst Toni Sacconaghi Jr.

"ACCELERATED" PARTNERSHIP. Sun could use the tonic because it's bleeding market share as well as red ink. In the first quarter of 2004, it was the only major server maker to see year-over-year server sales decline. Its 10.2% share of the $11.5 billion quarterly market is down 6.8 points since 2000 and off 2.3 points in just the last year, according to market researcher IDC. Meanwhile, Fujitsu's share is slowly growing -- 8% in the first quarter, up 3 points since 2000.

Codenamed the Advanced Product Line, or APL, Sun says the new servers should have twice the processing power of their current servers and will replace Sun's SunFire and Fujitsu's PrimePower lines. Fujitsu sells servers based on Sun technology in a partnership with Siemens (SI) of Germany.

The "accelerated" Fujitsu partnership, as McNealy calls it, is a good step in Sun's newfound austerity. But plenty more needs to be done before Sun finds its way back to profitability. Kerstetter covers Sun from the San Mateo bureau of BusinessWeek

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