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2. S U N MI C R O SYST E M S, INC.
19 9 8 A N N UA L R E P O RT
3. An expanded, dynamic version of Sun’s Annual Report is available on the Internet at www.sun.com/annualreport
4. Table of Contents
FINANCIAL HIGHLIGHTS 2
VISION 3
LETTER FROM THE CHAIRMAN 4
OPPORTUNITY 5
SUCCESS 11
THE LAST TEN YEARS 14
FINANCIAL REVIEW 16
ABOUT YOUR INVESTMENT 45
CORPORATE INFORMATION/SUN WORLDWIDE 47
1
5. Financial Highlights
9,791 1,130 1.93
4,690
.50
277
94 98 94 98 94 98
NET REVENUES OPERATING INCOME NET INCOME PER COMMON
1
(in millions of dollars) (in millions of dollars) SHARE—DILUTED
(in dollars)
1998 1997 CHANGE
Net revenues (thousands) $ 9,790,840 $ 8,598,346 14%
Net income (thousands) $ 762,862 $ 762,420 0%
1
Net income per common share—diluted $ 1.93 $ 1.96 –2%
Return on average stockholders’ equity (12 month average) 24% 31% –23%
2
Return on average capital 24% 30% –21%
Estimated number of stockholders 341,000 289,000 18%
Total employees at year end 26,343 21,553 22%
Shares used in the calculation of net income per common share—diluted 394,274,000 388,967,000 1%
Outstanding shares 376,304,000 370,485,000 2%
Book value per outstanding share $ 9.34 $ 7.40 26%
1
FOR 1998, THE AMOUNT INCLUDES 37 CENTS OF ACQUISITION-RELATED CHARGES. FOR 1997, THE AMOUNT INCLUDES A GAIN ON THE SALE OF AN EQUITY INVESTMENT, PARTIALLY OFFSET BY AN
ACQUISITION-RELATED CHARGE. THE NET IMPACT OF THESE ITEMS INCREASED NET INCOME PER COMMON SHARE BY 7 CENTS IN 1997.
2
CAPITAL COMBINES STOCKHOLDERS’ EQUITY AND INTEREST-BEARING LONG-TERM OBLIGATIONS TO PROVIDE A MEASURE OF HOW EFFECTIVELY SUN EMPLOYS EXTERNALLY PROVIDED FUNDS.
30
2
6. Sun in Brief
VISION Networked Customers,
Networked Consumers Networked Enterprise
Suppliers, Partners
In an industry synonymous with change, Sun has had one constant vision. It’s at the
heart of every technology, system, software, and service we offer today—and the
focus of everything we invest in for tomorrow. It’s the one thing that never changes:
The Network Is The Computer.™ Through open interfaces, industry standards, and
platform-independent Java™ technologies, we’re working to provide seamless connec-
tivity to anyone, anywhere, anytime, on virtually anything.
3
7. Translations of this letter—in Japanese, German,
Letter from the Chairman
Spanish, Chinese, Korean, and French—are available
on the Internet at www.sun.com/ceoletter
To our stockholders:
It’s gratifying to see what the right vision and the right focus an airport computing kiosk, a hotel set-top box, or a client’s
can do for a company. For Sun, and for our stockholders, fiscal workstation—anywhere you happen to be. So we won’t
1998 was yet another outstanding year—a year in which we need to carry our computers with us—the network will
set records not only for revenues, but also for operating be everywhere we go. That’s pretty heady stuff. And it’s
income, net income, and net cash from operating activities. closer than you might think. Already it’s opening a world
of O P P O R T U N I T Y for Sun™ technologies, products,
As noted in last year’s letter, we owe much of our success to and services.
services.
our adherence to a powerful vision. A vision of computers,
programs, and people working together across any boundary. You may not see the Sun brand on personal organizers
For 16 years now, we’ve based our solutions on open (non- or set-top boxes or Web phones— at least in the near
phones—at
proprietary) interfaces and industry standards—an approach future—but I like to think of it this way: Others make the
that encourages innovation throughout the industry and devices. We make them possible by selling them network-
gives customers greater flexibility and choice. We believe, as enabling components.
we always have, that proprietary architectures promoted by
some of our competitors have no place in the network age. One way we do that is with our widely adopted Java
Our customers seem to agree—they’ve made Sun one technologies. Right now, the momentum and energy
of the world’s top providers of network computing solutions. behind the Java platform is astonishing. It has become a
standard for the smart-card industry and for leading Web
phone manufacturers. It’s also being widely deployed in
home banking, retail point-of-sale applications, and major
The network now stretches from the data center all the way to
segments of the telecommunications industry.
smart cards, palmtop computers, Web phones—and probably
some devices that don’t have names yet. Imagine a world
Just this year, Sun signed Java technology licensing agree-
where all your devices—computers, cars, televisions, kitchen
ments with Sony, Motorola, TCI, Ericsson, Samsung,Alcatel,
ments with Sony, Motorola, Ericsson, Samsung, Alcatel,
appliances—speak to each other over a network that goes
Nortel, OpenTV, BEA Systems, Siemens-Nixdorf, and Scientific
wherever you do. Imagine being able to access your personal
desktop from any computer—just by swiping a smart card at
4
8. OPPORTUNITY
Networked Networked Networked Customers,
Consumers Enterprise Suppliers, Partners
The network is an expanding universe of information and an
expanding market for Sun’s products and services.
OPEN HERE FOR A DETAILED LOOK AT SUN’S EXPANDING OPPORTUNITIES
9. T H E N E T W O R K E XT E N D S TO A L L O F U S.
The diagram below represents the reach of network computing today—Sun products and enabling technologies working seamlessly with products from other companies through open standards.
THE NET THE NET THE NET THE NET
SECURITY SECURITY
SOLUTION SOLUTION
Networked Networked Networked Customers,
Enhanced Personal Personal
E-mail Web Servers
Handheld PDAs
Consumers Enterprise Suppliers, Partners
Function ATMs Computers Computers
No matter where they Thanks to Internet stan-
Organizations in virtually Application
In-Store Kiosks Databases Mainframes Servers
Cellular Phones are or what time it is, dards, platform-independent
every industry use the Servers
people want instant Java technologies, and
network to share informa-
access to information, to advanced network security
tion across departments
Network Network Network
their financial resources, products, whole organiza-
and widespread offices, Storage E-mail
Web Phones
Computers Computers Computers
to communication services. tions are able to interact
through a combination of
And they’re getting it— over the network, reducing
systems, software, and
through an ever-expanding cycle times.
networking products.
Personal Application Network Routers Databases E-commerce
Smart Cards
Computers Servers
variety of access devices.
Web Servers
Workstations
Sun’s opportunities span the network—from systems to software to comprehensive services.
Consumer and Microprocessors
Systems and Storage Enterprise Services Enterprise Software Java Products Embedded Technologies
Sun offers an integrated portfolio Highly reliable, scalable, and easy to It’s the platform that started a revolu- By promoting industry standards, open Powering networked systems from
Our network-ready Ultra™ workstations
use, the Solaris™ operating environment tion: The Write Once, Run Anywhere™
of services to help customers plan, interfaces, and platform-independent routers to supercomputers, Sun’s highly
and Sun Enterprise™ servers comprise
scalable UltraSPARC™ microprocessors
design, implement, and manage provides a solid foundation for building software environment that provides a Java technologies, Sun enables a
the broadest, most scalable line of
innovative, mission-critical network an integrated enterprise supporting comprehensive, robust solution to the wide range of systems to talk to each accelerate multimedia and networking
binary-compatible systems anywhere.
computing solutions. Our professional vast data warehouses and thousands challenges of programming for the other—from smart cards to cellular applications with their innovative
Sun StorEdge™ network storage systems
architecture and VIS™ instruction set.
services experts work closely with of users. Sun Internet Mail Server Internet and other complex networks. phones to touch-screen kiosks. To build
are the building blocks to construct
customers to align their information provides e-mail that works on a global It has become one of the fastest this new generation of network-ready
intelligent storage networks. And our
systems with their business goals. scale. Sun also offers developer tools, growing software technologies in information appliances, manufacturers
JavaStation™ systems are at the
enterprise management software, and history—and the basis of many new are turning to Sun for innovative
forefront of the thin-client movement.
network security solutions. systems, services, and solutions solutions.
from Sun.
6 7
10. As for the opportunities most ofus this past year, I’d say
we certainly made the before them. In all our major
Atlanta—and announced a major partnership with IBM on
™ we certainly made the most of them. In all our govern-
markets—telecommunications, financial services, major
JavaOS for Business.
ment, manufacturing, education—we signed contracts that
markets—telecommunications, financial services, govern-
Many ofnew new devices these companies create connect
All the the devices these companies create connect to ment, manufacturing, the strength of our tested-and-proven
were won primarily on education—we signed contracts that
to servers and network storage—which happen to be two
servers and network storage—which happen to be two of network computing solutions.
were won primarily on the strength of our tested-and-proven
of our strengths.
our strengths. network computing solutions.
For instance, we earned the right to supply the U.S. Postal
In other words, our core competencies are the very tech- For instance, Sunearned the right to supply the U.S. Postal
Service with we Enterprise servers, the Solaris operating
nologies, products, and services that keep this extended Service with Sun Enterprise servers, the Solaris operating
environment, Java technology, and professional services—a
network running. That’s why so much of our effort this environment, Java technology, and over five years.
contract worth up to $500 million professional services—a
year has been directed toward what we call the WebTone— contract worth up to $500 million over five years.
computing that’s as powerful as a supercomputer, yet as The Toronto Stock Exchange, Canada’s premier capital
reliable (and as easy to use) as a telephone. The Toronto trades Exchange, Canada’s billion a day, chose
market with Stock of approximately $2 premier exchange,
representing and network storage systems to support vol-
Sun servers more than 80 percent of the daily traded its
ume TOREX trading system. a day in trades, chose Sun
It’s what our customers (and their customers) want. For new or approximately $2 billion
servers and network storage systemsthe support its new
AT&T Business Markets Division chose to Sun platform to
their corporate intranets, and for the extranets that link
them with their suppliers, partners, and customers. It’s TOREX trading be the world’s largest data warehouse with
build what may system.
more than 60 terabytes of customer information.
why they’re choosing our highly reliable, industrial-
why they’re choosing our highly reliable, industrial-
strength products. AT&T Business Markets Division chose the Sun platform to
strength products.
Ford Motor Company’s Vehicle Operations selected Sun as
help them build what may be the world’s largest data ware-
its workstation partner to help implement Ford’s computer-
Many companies are currently re-architecting and recen- house with more than 60 terabytes of customer information.
Many companies are currently re-architecting and recen-
aided design, manufacturing, and engineering vision.
tralizing their information systems, easing administrative
tralizing their information systems, easing administrative
burdens, lowering costs, and offering a whole new level of Ford Motor Company’s Vehicle Operations selected Sun as
burdens, lowering costs, and offering a whole new level of
network services. As server consolidation and recentraliza- its workstation partner to helpmarketshare gains as well,
We made some remarkable implement Ford’s computer-
network services. As server consolidation and recentraliza-
aided in arenas where we hadn’t engineering vision.force.
even design, manufacturing, and previously been a
tion efforts move into full swing, we’ve seen sales of our
tion efforts move into full swing, we’ve seen sales of our
Take workgroup servers, for instance, where we’re now
systems for enterprise resource planning increase signifi-
systems for enterprise resource planning increase signifi-
We 1 in the UNIX® market, up marketshare gainshigh-end,
No. made some remarkable from No. 3. Or the as well,
cantly—and our partnerships with ERP vendors such as
cantly—and our partnerships with ERP vendors such as
Baan, Oracle, PeopleSoft, and SAP grow even stronger. even in arenas simply not a presence last yearbeen areforce.
where we were where we hadn’t previously and a now
Baan, Oracle, PeopleSoft, and SAP grow even stronger.
Take3workgroup servers, for instance, where we’re now
No. in the UNIX market, on the strength of our award-
winning Sun Enterprise 10000 system. In the midrange,
You can see why we’re so excited about where the network No. 1 in the UNIX® market, up from No. 3. Or the high-end,
You can see why we’re so excited about where the network
*
whereNo. wereUNIX, No. 3aoverall. Put it year, we are now
we’re we 1 in simply not presence last all together and
is going. Because as it expands into virtually every aspect
is going. Because as it expands into virtually every aspect
of our lives, Sun’s opportunities expand right along with it. No. 3 in the UNIXleading supplier of UNIX servers. award-
Sun is the world’s market, on the strength of our
of our lives, Sun’s opportunities expand right along with it.
winning Sun Enterprise 10000 system. We’re also No. 1
in UNIX midrange servers. Put it all together and Sun is
*
As for the opportunities before us this past year, I’d say a world leader in UNIX servers.
8
11. Our refreshed the midrange servers stronger than ever.
We product line is now broader and in our Sun Enterprise
In data storage, where we once sold subsystems only for
data storage, where we once sold subsystems only
for our own computers, we now sell devicesthat work in
our own computers, we now sell devices that work line, boosting performance by up to 43 percent and adding
We refreshed the midrange serversfound only in systems
high-availability features normally in our Sun Enterprise
mixed-platform environments. (Thanks to our acquisition
environments—thanks
line, boosting times more. And up to 43 percent and adding
costing many performance by we extended our workgroup
of Encore, completed this year. *What’sresult, we rose to
completed this year. ) As a more,
high-availability features normally found only in systems
No. 1 in UNIX storage and No. 5 overall.* server family with two new models—the Sun Enterprise
costing many times more. And we extended ourto the work-
250 and 450—that bring enterprise capabilities workgroup
That’s not to discount our traditional markets: We’re still
server at an affordable price. models—the Sun Enterprise
group family with two new
That’s not to discount our traditional markets: We’re still
the No. 1 UNIX workstation vendor by a wide margin, and
250 and 450—that bring enterprise capabilities to the work-
the No. 1 UNIX workstation vendor by a wide margin, and
we remain No. 1 in 10 of the top 17 technical markets
group atintroduced new Netra™ systems—the Netra t 1120
We also an affordable price.
we remain No. 1 in 10 of the top 17 technical markets
where these systems are used.*
where these systems are used. server, which meets stringent telecommunications standards,
We also introduced new Netra™ systems—the Netra t 1120
and the Netra Proxy Cache server, which enables Internet
Our Solaris environment is stronger than ever—and has
server, which meets deliver faster access to frequently visited
service providers to stringent telecommunications standards,
Our Solaris environment is stronger than ever—and grow-
grown at double the rate of the UNIX market in general.
and the Netra Proxy Cache server, which enables Internet
Many of the leading Internet UNIX market in general. Ten
ing at double the rate of the service providers use Solaris Web sites.
service providers to deliver faster access to frequently visited
of 12 leading Internet service providers use Solaris soft-
software, and it is fast becoming the platform of choice for
ERP asand it is fast becoming the platform of choice for
ware, well. Webwe literally redefined storage this year. Our full line of
And sites.
ERP as well. Sun StorEdge systems delivers mainframe-class reliability,
And we literally redefined storage this year. Our full line of
At the same time, we’ve altered our organization some-
Sun StorEdge systems delivers mainframe-class reliability,
outstanding expandability, and cross-platform information
what to map to these market opportunities. With the
outstanding expandability, andcompete in every corner of
sharing. Which enables us to cross-platform information
formation of a new we’ve altered our organization some-
At the same time, executive committee, including Chief
sharing.billion market. us to compete in every corner of
this $28 Which enables
Operating Officer these market opportunities. WithMike
what to map to Ed Zander, Chief Financial Officer the
this $28 billion market.
Lehman, and a newStrategy Officer Bill Raduchel, weChief
formation of Chief executive committee, including took
a hard lookOfficer Ed Zander, Chief Financial Officer Mike
Operating at streamlining our operations. By eliminating Extending our leadership in the workstation market, we
Extending our leadership in the workstation market, we
overlap, we have been able to sharpen our focus on strategic
Lehman, and Chief Strategy Officer Bill Raduchel, we took a introduced a series of new Ultra systems that deliver UNIX
introduced a series of new Ultra systems that deliver UNIX
opportunities in networkour operations, eliminating overlap
hard look at streamlining storage as well as consumer and performance at PC prices. They even provide PC compatibility.
performance at PC prices. They even provide PC compatibility.
embedded products. groups to go after key markets such
and then creating new
as network storage and consumer and embedded products. This year saw a great deal of industry consolidation around
We have continued to expand our professional services this our Solaris operating environment. Fujitsu, Toshiba, Amdahl,
Solaris operating environment. Toshiba, Fujitsu, and
year, significantly increasing our head count for consulting,
We have continued to expand our professional services this Siemens-Nixdorf joined NCR NCR in licensinghighly scalable
and Siemens-Nixdorf joined in licensing our our highly scal-
integration, and management services. And we continue
year, significantly increasing our head count for consulting, able environment—which promises to expand the
environment—which should help to expand the Solaris
to offer our customers mission-critical support, 24 hours a
integration, and management services. And we continue market and attract even more software developers to the
day, seven days a week. All of which we view as vital to our
platform. We also signed a cross-licensing agreement with
also signed an agreement with Intel to port
to offer our customers mission-critical support, 24 hours a
success and that of our customers.
the Solaris environment to Intel Architecture processors
day, seven days a week. All of which we view as vital to our Intel and opened a joint porting and tuning center. We will
and have opened optimize our Solaris environment with
work together to a porting and tuning center. We will
success and that of our customers.
work together toMerced processor, andenvironment with
Intel’s upcoming optimize our Solaris provide technical
*Market references noted above reflect findings from the 1997 IDC World-
wide product line Reports: broader and stronger than ever.
Our Market Share is now Entry Server (shipments); High-End Server Intel’s upcoming Merced processor, and provide technical
assistance to independent software vendors and original
(revenue); Midrange Server (shipments); Workstation Census (shipments
assistance to independent software vendors and original
equipment manufacturers.
and revenue); the 1998 IDC Worldwide Disk Subsystems Report (revenue);
and based on a compilation of data about Sun and its competitors derived
equipment manufacturers.
from the sources previously listed.
9
12. With mergers and consolidations producing formidable
We also unveiled our third-generation UltraSPARC micro-
competitors—and as those competitors see the value in our
processor, a highly scalable design that should make it
network computing vision—we’ll have to work harder than
possible to build systems with more than a thousand proces-
ever to differentiate ourselves and demonstrate the unique
sors. The new design is slated to deliver three times the
value of our solutions. To that end, we are aggressively pur-
performance of our current processors while maintaining
suing our branding and demand-creation strategies.
complete compatibility with our entire product family.
But our biggest challenge is simply this: Keep delivering the
highest quality products and services we can. To help bring
This pace of innovation doesn’t come cheaply: Maintaining
that about, we are on course to complete the reengineer-
leadership means digging deep and investing in the technolo-
ing of our major business processes during fiscal 1999. Once
gies that sustain your company. We invested over $1 billion
installed and operating as designed, this highly flexible
in research and development last year and employ some of
new infrastructure is expected to shorten our quote-to-
the world’s leading experts in advanced technologies such
collect and procure-to-pay cycle times.
as microprocessor design, system design, operating system
software, networking, and, of course, the Java platform.
We are certainly aware of the ongoing situation in the
markets of Japan and Southeast Asia, and we will continue
One of the most significant innovations this year was our
to monitor this over the coming months to balance appro-
Jini ™ software technology. Aimed at simplifying network
priate investment levels with returns. But we have always
computing, this new technology offers the potential to
considered Asia a strategic market for Sun, and continue
make any intelligent electronic device an instantly con-
to do so.
nected node on the network.
At this point I’d like to take the opportunity to thank our
We acquired NetDynamics, Inc., an early adopter of Java
more than 26,000 employees worldwide. Investing in bright,
technology. We believe NetDynamics’ strengths—application
competent, dedicated people always pays off. They are the
server software, application integration, and development
reason for Sun’s phenomenal SUCCESS this year.
tools—are the linchpins for a new application platform.
We plan to augment these technologies to produce next-
Finally, we base the compensation of our executives and
generation products and solutions.
managers—as well as the profit- sharing plan for U.S.
employees—on a rigorous metric of meaningful revenue
Most importantly, we invested in our own intellectual prop-
growth, earnings, quality, and customer loyalty. We will
™
erties—specifically, SPARC, Solaris, and Java technologies.
continue to align these factors with stockholder value.
We own these intellectual properties, yes, but we have
Once again, thank you for your support.
always made the interfaces readily available, and continue
to do so. It’s the best way to drive the pace of innovation.
Having the right vision and the right strategy can only take
a company so far. Then you simply have to get the job done.
At Sun, we have a team in place that is 100 percent focused Scott G. McNealy
on the challenges ahead. Chairman of the Board, President,
and Chief Executive Officer
scottg.mcnealy@corp.sun.com
10
13. SUCCESS
Consumer
Systems Enterprise
Enterprise
Java Products and Embedded Microprocessors
Services
and Storage Software Technologies
Our innovative products and constant customer focus have
made Sun a premier provider of network computing solutions.
OPEN HERE FOR A DETAILED LOOK AT SUN’S RECENT SUCCESSES
14. MAKING CUSTOMERS SUCCESSFUL HAS MADE SUN SUCCESSFUL.
Sun’s network computing customers
Tokyo U.S. Kaiser Parametric
Mitsubishi Eli Lilly Department University Foundation Technology The SABRE
Convergys International and Company of Energy of Utah FNAC AT&T Amazon.com Spirit Energy 76 Health Plan, Inc. Motorola Corporation Group
Telecommunications Financial Services Manufacturing Government Education Retail Internet Service Provider E-Commerce Energy Health Care Consumer Products Software Development Transportation
For telecom carriers, Tokyo Mitsubishi Eli Lilly and Company, Under a four-year With 15 colleges and FNAC, one of France’s When AT&T launched With more than Spirit Energy 76, Kaiser Foundation In Sun’s largest Java PTC is the world’s fifth The SABRE Group is
the ability to efficiently International, key a leading research- research and develop- 27,000 students, the leading retailers of its IP services for 3 million titles, the U.S. Lower 48 Health Plan, Inc.— technology licensing largest independent a global leader in
generate bills and investment banking based pharmaceutical ment contract within University of Utah is records, books, videos, business customers Amazon.com may be Exploration & Produc- the largest health deal to date, Motorola software company and the travel and trans-
support customers is subsidiary of the Bank company, has chosen the PathForward the largest university and computers, has and consumers, the the world’s biggest tion Business Unit of maintenance organi- has licensed Sun’s full the leading supplier of portation industry,
nearly as important of Tokyo-Mitsubishi Sun servers and Program, Sun will in the state. To upgrade chosen Sun systems to company sought a book and music store. Unocal, a multinational zation in the U.S., family of Java technolo- software tools within offering strategic
as providing service. Limited, depends on storage systems to run work with the U.S. its computer systems, run its purchasing platform that would Now the online retailer energy company, serving 9.4 million gies, giving Motorola the mechanical com- solutions to more than
That’s why Convergys timely, accurate infor- its worldwide SAP Department of Energy prepare for the year and accounting applica- provide customers has turned to Sun recently purchased a members—purchased the ability to use those puter-aided design, 450 clients in over
(formerly CBIS), one mation. TMI increased operations, including on its Accelerated 2000, and ensure tions. The company with dependable servers, software, and range of Sun hardware 64 Sun servers to build technologies in its manufacturing, and 70 countries around
of the world’s leading the performance and corporate, financial, Strategic Computing ample capacity for selected the powerful service. It chose Sun’s storage systems to to support network, its nationwide Web product line, which engineering (CAD/ the world. This year,
providers of out- reliability of its data sales, distribution, Initiative. The contract growth, the university Sun Enterprise 10000 Solaris operating help serve its growing database, financial, server infrastructure. includes semicon- CAM/CAE) industry. In The SABRE Group
sourced billing and warehouse by consoli- human resources, and is worth an estimated chose Sun servers server and Sun StorEdge environment. Today, customer base. For and geological appli- The Sun servers will ductors, smart cards, a multimillion-dollar agreed to recommend
customer care services, dating 64 individual enterprise resource $11 million to Sun. The and storage systems A5000 disk array with AT&T’s presence on the its data warehouse cations. Priced at support both internal wireless devices, silicon deal, PTC purchased Sun’s JavaStation net-
relies on Sun Enterprise CPUs on a single planning applications. goal of the initiative to support PeopleSoft 2 terabytes of storage. Internet continues to and decision-support approximately $2.5 intranet functions and systems, automotive more than 400 Sun work computer as the
10000 servers for Sun Enterprise 10000 Sun’s record of service is to develop systems applications and an Sun will also provide a grow, both in number system, Amazon.com million, the systems external Internet components, and Ultra workstations. platform of choice for
processing millions system. This enables and support on SAP running up to 100 Oracle database. The mission-critical support of users and in services selected the Sun include two Sun Enter- projects such as a computers. As part The company will use QIK-ACCESS, its product
of phone bills every decision makers to implementations trillion operations per university found that package, a customized offered. The scalability Enterprise 10000 prise 10000 servers and member services Web of the agreement, the systems in the line of user-friendly
month—accurately access a wide range of was a key factor in second in order to the Sun Enterprise training program, of the Sun platform server with the robust four Sun StorEdge site. Kaiser selected Motorola will work development and interfaces for reserva-
and on time. risk-management data the decision. meet the requirements 10000 server met its and consulting services has proven itself, and Solaris operating A5000 storage systems. Sun based on its with Sun to bring its demonstration of its tions, airline check-in,
instantly, rather than of the Comprehensive price, performance, to define and imple- AT&T’s relationship environment, plus Sun Unocal uses Sun work- Internet experience. embedded and commu- popular Pro/ENGINEER and cargo manage-
waiting for overnight Test Ban Treaty. and other objectives. ment the production with Sun is expanding. StorEdge intelligent stations and servers in nications expertise to family of software tools. ment tools.
processing. environment. storage systems. other capacities as well. the Java environment.
Sun’s network computing products
Servers Workstations Storage Enterprise Services Enterprise Software Java Products Consumer and Microprocessors
Embedded Technologies
Sun is a market leader in UNIX Sun is the No. 1 UNIX Last year Sun rose to No. 1 With the world’s largest UNIX Many of the leading Internet More than 170 companies Sun’s SPARC processors are
servers: No. 1 in entry-level workstation vendor by a wide in UNIX storage, and with the service organization, supporting service providers use our have licensed Java technology Our Java technology has become now being produced at a rate
systems, No. 1 in midrange margin. No. 1 in 10 of 17 acquisition of Encore, we are more than one million systems, Solaris environment, and it is from Sun; more than 400 appli- a standard for the smart-card of one million units per year.
systems, and No. 3 in high-end technical markets (including well positioned for oppor- we deliver mission-critical the leading platform for top cations have received 100% industry and for leading Web The UltraSPARC-III processor
Pure Java™ certification; and the
data center systems—a EDA, MCAD, and medical tunities in the $28 billion open support—24 hours a day, seven ERP vendors such as Oracle, phone manufacturers. It is also will debut at 600 MHz and
category we entered just last imaging), we shipped a record storage market. Since 1995, days a week—along with com- PeopleSoft, and SAP. More Java Developer Connection has being widely deployed in home aims to increase Sun’s
SM
year with our award-winning number of units in the last we have shipped 11 petabytes prehensive enterprise services. than 12,000 applications run more than 548,000 members. banking, retail point-of-sale industry-leading scalability
Sun Enterprise 10000 server. quarter of fiscal 1998. of storage. on the Solaris platform. applications, and more. in UNIX systems.
12 13
15. THE LAST TEN YEARS
Sun’s revenues have grown an average of 26% annually
over the past decade as demand for our open network
computing products and services has increased. With
over 45% of our revenues generated outside the United
States in fiscal 1998, our portfolio of revenues by geog-
raphy is well balanced.
Net income has grown an average of 32.8% annually
over the past ten years, demonstrating the strength and
consistency of Sun’s business model.
While our vision and strategy have remained constant,
Rest of world
our market opportunities have expanded as companies Europe 1,732
U.S.
around the world recognize the benefits of open network
computing—resulting in more and more ERP implemen- 2,709
tations, ISP expansion, server consolidation programs,
and widespread Internet/intranet deployment.
5,350
We have invested carefully—in research and develop-
ment as well as demand creation—to capture our share
98
89
of these new opportunities.
REVENUES BY GEOGRAPHY
(in millions of dollars)
Sun is a global company with over
Sun’s excellence in financial and asset management 45% of its revenues generated outside
the United States. Despite the ongoing
continues to yield outstanding results in almost every macroeconomic difficulties in Japan
and Southeast Asia, Sun continued to
conventional measure of profitability and productivity. experience strong revenue growth in
the United States, Europe, and Latin
Our balance sheet is superb, and we are strongly capital- America, demonstrating the value of
a balanced geographical portfolio.
ized, positioning Sun well for future growth.
14
16. 9,791 1,130
1,014
234
1,765
88
98 98
98
89 89
89
NET REVENUES R &D INVESTMENT OPERATING INCOME
(in millions of dollars) (in millions of dollars) (in millions of dollars)
Net revenues grew nearly $1.2 billion During fiscal 1998, Sun invested approximately 10% Operating income as a percent of
in fiscal 1998, an increase of 13.9% from of its revenues in research and development, primarily revenues for fiscal 1998 was a robust
$8.6 billion in the previous year. in the areas of system design, SPARC microprocessors, 11.5%. Over the past decade, Sun’s
Solaris software, and Java technologies. Sun’s invest- operating income has increased 32.1%
ments in R&D have led to increasingly innovative on an average annual basis.
products and technologies that promise to change the
way customers think about network computing.
1,527
1,298
1.93
0.19
54
–97
98 98 98
89 89 89
NET INCOME PER COMMON CASH PORTFOLIO CASH FROM OPERATING ACTIVITIES
(in millions of dollars) (in millions of dollars)
SHARE—DILUTED
Excellent financial management resulted In fiscal 1998, Sun achieved record net cash
(in dollars)
in a strong balance sheet. Sun’s cash from operating activities of $1,527 million
Earnings per share for fiscal 1998 totaled $1.93,
portfolio, which includes cash, cash due to strong customer acceptance of Sun’s
which included acquisition-related charges.
equivalents, and short-term investments, server, storage, and workstation products.
Over the past ten years, Sun has grown earnings
totaled nearly $1.3 billion at the end
per share an average of 28.6%.
of fiscal 1998.
24.0
22.0
12.0
0.0
98 98
89 89
LONG-TERM DEBT-TO-EQUITY RATIO RETURN ON EQUITY
(percentage) (percentage)
Sun had no long-term debt at the end of In fiscal 1998, Sun’s return on equity was
fiscal 1998, resulting in a 0.0% long-term 24%, slightly lower than fiscal 1997, but
debt-to-equity ratio. an exceptional performance given the
macroeconomic difficulties throughout
Japan and Southeast Asia.
15
17. Financial Review
HISTORICAL FINANCIAL REVIEW OF SUN MICROSYSTEMS, INC. 18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
CONSOLIDATED STATEMENTS OF INCOME 26
CONSOLIDATED BALANCE SHEETS 27
CONSOLIDATED STATEMENTS OF CASH FLOWS 28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 44
16
19. Historical Financial Review of Sun Microsystems, Inc.
Summary Consolidated Statements of Income Years Ended June 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
(In millions, except per share amounts)
Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars % Dollars %
Net revenues $9,791 100.0 $8,598 100.0 $7,095 100.0 $5,902 100.0 $4,690 100.0 $4,309 100.0 $3,589 100.0 $3,221 100.0 $2,466 100.0 $1,765 100.0
Costs and expenses:
Cost of sales 4,693 47.9 4,320 50.2 3,921 55.3 3,336 56.5 2,753 58.7 2,518 58.4 1,963 54.7 1,758 54.6 1,399 56.7 1,010 57.2
Research and development 1,014 10.4 826 9.6 653 9.2 563 9.5 500 10.7 445 10.3 382 10.6 356 11.1 302 12.2 234 13.3
Selling, general and administrative 2,777 28.4 2,402 27.9 1,788 25.2 1,503 25.5 1,160 24.7 1,105 25.7 983 27.4 812 25.2 588 23.9 433 24.5
Purchased in-process research
and development 177 1.8 23 0.3 58 0.8 — — — — — — — — — — — — — —
Total costs and expenses 8,661 88.5 7,571 88.0 6,420 90.5 5,402 91.5 4,413 94.1 4,068 94.4 3,328 92.7 2,926 90.9 2,289 92.8 1,677 95.0
Operating income 1,130 11.5 1,027 12.0 675 9.5 500 8.5 277 5.9 241 5.6 261 7.3 295 9.1 177 7.2 88 5.0
Gain on sale of equity investment — — 62 0.7 — — — — — — — — — — — — — — — —
Interest income (expense), net 46 0.5 32 0.4 34 0.5 23 0.4 6 0.1 (2) — (6) (0.2) (11) (0.3) (23) (0.9) (10) (0.6)
Litigation settlement — — — — — — — — — — (15) (0.4) — — — — — — — —
Income before income taxes 1,176 12.0 1,121 13.1 709 10.0 523 8.9 283 6.0 224 5.2 255 7.1 284 8.8 154 6.3 78 4.4
Provision for income taxes 413 4.2 359 4.2 232 3.3 167 2.8 87 1.8 67 1.6 82 2.3 94 2.9 43 1.8 17 1.0
Net income $ 763 7.8 $ 762 8.9 $ 477 6.7 $ 356 6.1 $ 196 4.2 $ 157 3.6 $ 173 4.8 $ 190 5.9 $ 111 4.5 $ 61 3.4
Net income per common share—diluted $ 1.93 $ 1.96 $ 1.21 $ 0.91 $ 0.50 $ 0.37 $ 0.42 $ 0.45 $ 0.30 $ 0.19
Shares used in the calculation of net
income per common share—diluted 394 389 393 394 388 430 431 439 395 348
Operating and Capitalization Data Years Ended June 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
Total assets (millions) $ 5,771 $ 4,697 $ 3,801 $ 3,545 $ 2,898 $ 2,768 $ 2,672 $ 2,326 $ 1,779 $ 1,269
Long-term debt and other obligations (millions) $ 75 $ 106 $ 60 $ 91 $ 122 $ 178 $ 348 $ 401 $ 359 $ 145
Current ratio 2.0 2.0 2.0 2.2 2.0 2.4 2.6 2.5 2.6 1.9
Long-term debt-to-equity ratio — 0.015 0.018 0.039 0.075 0.11 0.23 0.33 0.39 0.22
Return on average equity 24% 31% 22% 19% 12% 10% 13% 18% 14% 12%
Return on average capital 24% 30% 23% 18% 12% 9% 10% 13% 11% 9%
Return on average assets 15% 18% 13% 11% 7% 6% 7% 9% 7% 6%
Effective income tax rate 35.1% 32% 33% 32% 33% 30% 32% 33% 28% 22%
Average shares and equivalents (thousands) 394,274 388,967 393,380 393,700 387,056 420,500 406,560 412,268 377,476 340,664
Book value per outstanding share $ 9.34 $ 7.40 $ 6.05 $ 5.39 $ 4.34 $ 4.03 $ 3.72 $ 3.15 $ 2.51 $ 1.97
18 19
20. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth items from Sun’s Consolidated Statements of Income as a percentage of net revenues:
1998 1997 1996
Net revenues:
Products 87.9 90.1 90.2
Services 12.1 9.9 9.8
Total net revenues 100.0% 100.0% 100.0%
Cost of sales:
Products 40.5 44.0 48.9
Services 7.4 6.2 6.4
Total cost of sales 47.9 50.2 55.3
Gross margin 52.1 49.8 44.7
Research and development 10.4 9.6 9.2
Selling, general and administrative 28.4 27.9 25.2
Purchased in-process research and development 1.8 0.3 0.8
Operating income 11.5 12.0 9.5
Gain on sale of investment — 0.7 —
Interest income, net 0.5 0.4 0.5
Income before income taxes 12.0 13.1 10.0
Provision for income taxes 4.2 4.2 3.3
Net income 7.8% 8.9% 6.7%
This Annual Report, including the following sections, contains demand throughout thein fiscal 1997. More than 50% of the
$1,355 million, or 21%, fiscal year for workgroup, enterprise,
forward-looking statements within the meaning of the and departmental servers and high-end desktop systemsfrom
increase in products revenues in fiscal 1998 resulted and
Private Securities Litigation Reform Act of 1995, particularly to a lesser demand throughout the fiscalmemory and related
increased extent from high-end storage, year for workgroup,
statements regarding market opportunities, market share products. The increase in products revenues in fiscal 1997
enterprise, and departmental servers and high-end desktop
growth, competitive growth, new product introductions, over fiscal 1996 was primarilyfrom high-endto increased ship-
systems and to a lesser extent attributable storage, memory
success of research and development, research and devel- ments of richly configured servers, and products revenues in
and related products. The increase in higher revenues from
opment expenses, customer acceptance of new products, memory, storage options, andwas primarily attributable to
fiscal 1997 over fiscal 1996 accessories.
gross margin and selling, general and administrative expenses.
margin and selling, and general and administrative Sun’s services net revenues increased $336servers, and40%, to
increased shipments of richly configured million, or higher
expenses. These forward-looking statements involve risks and
These forward-looking statements involve risks and uncer- $1,188 million memory, 1998, compared and accessories. of
revenues from in fiscal storage options, with an increase
uncertainties, and the cautionary statements setforth below,
tainties, and the cautionary statements set forth $149 million, or 21%, in fiscal 1997. The increase in services
Sun’s services net revenues increased $336 million, or 40%, to
specifically those contained in “Future Operating Results,”
specifically those contained in “Future Operating revenues is primarily the result of a larger installed product
$1,188 million in fiscal 1998, compared with an increase of
identify important factors that could cause actual results to base due to increased in fiscal 1997.sales increase in services
$149 million, or 21%, product unit The as described above,
differ materially from those predicted in any such forward-
such forward- as well as is primarily the result of a larger installed product
revenues increased revenues associated with Sun professional
looking statements. Such factors include, but are not limited services. Theincreased in services revenue as described above,
base due to increase product unit sales from fiscal 1996 to
to, adverse changes in general economic conditions, including fiscal 1997 is primarily the result of products Sun professional
as well as increased revenues associated with revenue growth.
adverse changes in the specific markets for the Company’s
In fiscal 1998 increase in1997, domestic net revenues grew by
services. The and fiscal services revenue from fiscal 1996 to
products, adverse business conditions, decreased or or lack
products, adverse business conditions, decreased lack of
16% and 25%, respectively, whileof products revenue growth.
fiscal 1997 is primarily the result international net revenues
of growth in computing industry, adverseadverse changes in
growth in the the computing industry, changes in customer
(including United States1997, domestic 12%revenues grew by
In fiscal 1998 and fiscal exports) grew net and 17%, respec-
customer order patterns, increased competition, lack of
order patterns, increased competition, lack of acceptance
tively. Revenues from international operationsnet revenues
16% and 25%, respectively, while international represented
acceptance of new products, pricing pressures, lack technolog-
new products, pricing pressures, lack of success in of success
(including United States exports) grew 12% and 17%, respec-
48%, 49%, and 50% of total revenues in fiscal 1998, 1997, and
in technological advancements, riskswith foreign operations
ical advancements, risks associated associated with foreign
1996, respectively.
tively. Revenues from international operations represented
operations, and other factors, including those listed below.
(including the downturn of economic trends and unfavorable
European net revenuestotal revenues in fiscal 1998, 1997,1997,
48%, 49%, and 50% of increased 20% in fiscal 1998 and and
currency movements in the Asia Pacific marketplace), risks asso-
Results of Operationsefforts to comply with Year 2000 1996, respectively.
ciated with the Company’s primarily due to continued market acceptance of Sun’s
NET REVENUES other factors, including those listed below.
requirements, and network computing products and services in most major
European net revenues increased 20% in fiscal 1998 and 1997,
Sun’s products net revenues increased $856 million, or 11%, European markets.continued market acceptance of Sun’s
primarily due to
Results of Operations
to $8,603 million in fiscal 1998, compared with an increase of Japan net computing products and services in compared to
network revenues decreased 5% for fiscal 1998, most major
NET REVENUES
$1,356 million, or 21%, in fiscal 1997. More than 50% of the European markets. fiscal 1997. The Company attributes the
a decrease of 3% in
increase in net revenues in fiscal 1998 resultedmillion, or 11%,
Sun’s products net revenues increased $856 from increased decrease in revenues from 3% 5% fiscal 1997 to 5% in fiscal
Japan net revenues decreased in for fiscal 1998, compared
to $8,603 million in fiscal 1998, compared with an increase of to a decrease of 3% in fiscal 1997. The Company attributes
20
