At Long Last, Sun Rolls Out New Server Line

Updated from 11:03 a.m. ET

The agonizing rollout of Sun Microsystems' (SUNW Quote - Cramer on SUNW - Stock Picks) UltraSparc III-based servers made its latest step Wednesday, as the company introduced its new midrange Unix server line at the Equitable Theatre in midtown Manhattan.

The starting prices for the four new servers, which will be loaded with eight, 12 or 24 Ultrasparc III chips, range from $73,000 to $250,000. In an effort to conjure up associations with vast computing capacity, Sun is dubbing the servers "midframes."

UltraSparc III has been a long time coming for Sun. The chip was introduced about a year behind the company's original schedule, and Wednesday's products arrived six months after Sun unveiled its first UltraSparc III servers last September. Since then, Sun has been dogged by charges of delays in shipments of UltraSparc III-based systems, charges that the company has repeatedly denied. Tuesday, Sanford Bernstein analyst Toni Sacconaghi issued a research note saying that UltraSparc III products that Sun had announced last September -- the low-end Sunblade 1000 and SunFire 280R servers -- are still not shipping through Sun's resellers, through which the company gets about half its sales. Sacconaghi cited distributors who noted that Sun has pushed out the availability date on those products "several times." (Sanford Bernstein has done no underwriting for Sun.)

Sun attempted to deflect fears over shipping delays Wednesday. John Shoemaker, executive vice president of systems products, said that the company was shipping its low-end UltraSparc III servers in volume, though he didn't address the issue of the reseller channel directly. "We're ramping well at Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks) now," Shoemaker said. "Moving forward, we hope to be shipping 900 megahertz chips at the end of Q4, and ramping in Q1." (TI produces the company's UltraSparc processors.)

The Transition

It would be difficult to overstate the success of Sun's transition to UltraSparc III. It was Sun's good fortune that huge competitors like IBM (IBM Quote - Cramer on IBM - Stock Picks) and Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) had decided to neglect the Unix market in the mid- to late-1990s -- just when the Internet, and the corresponding demand for Unix servers, took off. Thus far, two factors have helped Sun make huge gains in market share despite its aging UltraSparc II-based product line: a lack of serious competition, and intense demand from dot-com customers and the enterprise establishment players trying to ward them off.

Now, both H-P and IBM are back on track, aggressively building out their Unix offerings to complement their already formidable line of servers based on the Windows NT operating system, which also compete with Sun's products. Most important, the economic landscape is vastly changed since last year, with enterprise customers reining in spending and many dot-com customers simply vaporized.

John Loicono, Sun's chief marketing officer, said that Sun would have about 500 units of its new midframe servers build by next week. He said that the company would be shipping thousands of units in the next 30 to 60 days, and would remain "supply constrained" until sometime in the fourth quarter, which starts April 1.

It's critical that Sun executes, for new slipups will be much costlier than they've been in the past. Any shipping delays could hit sales hard in the coming quarter, as customers will be much less willing to purchase older systems now that the new ones have been announced.

The Environment

"It's not a good environment," said Mike Davey, an analyst at Investec Ernst who has no position in Sun. "I wouldn't want to be in their position. I mean, people already have servers. They work."

In a question-and-answer session with analysts, CEO Scott McNealy refused to give any financial guidance in connection with the new products. "None of us has any visibility whatsoever," McNealy said. "I'm not gun shy. But after what happened recently, there's no way we're going to make a prediction. You can tell week to week whether someone is staying strong or softening. We really rely on the analysts to tell us what's going on."

Sun's stock, which has plummeted about 70% since September amid the general decline in technology stocks and the company's own warning of slowing sales, was lately up $1.19, or 6.8%, to $18.56.