The Day Ahead: Sun, Gateway: Don't call us hardware companies

Some hardware companies just hate being called hardware companies. Sun and Gateway, which predominately sell hardware, are pushing their Internet strategies
Written by Larry Dignan, Contributing Editor on

Sun Microsystems sells servers and workstations, but wants to be known as the dot in dot-com. Gateway sells PCs, but can't stop talking about its "Beyond the Box" sales.

Both companies have done great jobs of diversifying their businesses, so you can't gripe too much, but the reality is a lot different from the marketing pitch.

We'll start with Sun, which reported a stellar third quarter. CEO Scott McNealy said the company "kicked some serious bottom out there."

And he wasn't kidding.

Sun posted a profit of $436.2m (£274.41m), or 26 cents a share, on record sales of $4bn. First Call consensus expected it to earn 23 cents a share in the quarter.

Sun, as many ZDNet readers already know, sells the high-end Unix servers that power many networks. Sun gets a lot of press -- all by design -- for its criticism of Microsoft, nifty Java technologies and dot-com strategy.

All the buzz surrounding Sun, however, downplays the fact it's predominately a hardware company.

Officials said Sun picked up Unix server market share on Hewlett-Packard and IBM. Both IBM and HP have been pushing hard with e-business and e-services strategies.

Meanwhile, Sun has to defend itself from Linux companies such as VA Linux and Red Hat. Intel is taking aim at Sun's Ultra SPARC processor. Sun also competes with EMC in the storage market.

That's a lot of hardware competitors. Most of Sun's revenue growth, 35 percent in its third quarter, comes from hardware sales. Sun will tell you it sells systems -- software, services and hardware. It's mostly hardware, which is just as susceptible to price competition and product leapfrogging as ever.

Sun officials drove the hardware focus home, much to their chagrin. Sun likes to boast about how it sells its wares to hundreds of dot-coms. Let's face it -- Sun, the dot-com infrastructure company, gets a better market capitalisation than Sun, the hardware company.

Analysts, who have bought into the Sun marketing pitch, asked officials what happens if the Drkoop.coms go under. It's a fair question: Sun caters to dot-coms, many of which are low on cash.

The answer? Don't worry, said Sun officials. "Dot-coms are a relatively small part of our business," said operating chief Ed Zander.

Oh, really? Sun is the dot in dot-com as long as dot-com customers aren't on skid row. Zander said some of its Internet customers will become huge companies that will buy tons of equipment. For now, CFO Michael Lehman said Sun doesn't even record revenue for young dot-coms until they are self-sustaining.

None of those facts keeps Sun from touting new customers such as GlobeXplorer.com, SiliconPeak.com and Broadbandoffice.com (see Sun's presentation slide).

Zander said he would much rather ship 3,000 servers to America Online or do an original equipment manufacturer deal with Lucent Technologies than do 100 dot-com deals. Who can blame him?

Just to be clear, Sun officials said the "dot in dot-com" pitch refers to applying the Internet everywhere. Sounds fair, but maybe Sun should stop telling us it has zillions of up-and-coming dot-com customers if they only contribute a small bit of revenue.

And then there's Gateway. Officials said "Beyond the Box" at least every other sentence on the company's earnings conference call. Gateway will tell you all about its "Beyond the Box" plans because it's easier than explaining sluggish PC business sales.

Gateway met analysts' estimates in its first quarter Thursday, earning $136m, or 41 cents a share, on sales of $2.34bn.

Gateway said 25 percent of its sales are now "Beyond the Box." That's impressive, but not enough.

"As we look at our Q1 results, I would characterize them as mixed," CFO John Todd said during a Thursday afternoon conference call with analysts. "The revenue results were somewhat disappointing, with the business-to-business not coming back as strongly as we expected."

Gateway execs said their "Beyond the Box" strategy will move the company away from its reliance on pure hardware revenue and more to services attached to the PC, such as ISPs, training and financing.

Good for Gateway, but it isn't there yet. As Gateway's earnings show, the company is still "Stuck with the Box."

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