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Sun Optimistic On Funding Virtualization, MySQL

Company executives see improvements in overseas revenue growth as it builds out its xVM and open source database vision.

Sun Microsystems is talking about entering the virtualization marketplace and putting the MySQL database into its own Web 2.0 software stack. But there's a persistent undercurrent of comment on how Sun can afford to pay for these initiatives.

For example, Sun said at Oracle OpenWorld last fall that it planned to spend $2 billion on R&D to enter the virtualization market. On Wednesday, CEO Jonathan Schwartz corrected the impression of a big outflow of R&D funds. Sun considers its work on the Java Virtual Machine, an old investment that started in the early 1990s, as an investment in virtualization. New storage products also count as virtualization R&D as well. These products, of course, are pre-existing and have little to do with Sun's new xVM hypervisor or its upcoming xVM Ops Center management software.

"Everything we do is related to virtualization," Schwartz explained to a member of the press at Sun's Global Media Summit Wednesday. The $2 billion figure actually is what Sun spends on all R&D in a year, not a virtualization-specific initiative. A member of the foreign press asked how the number came up at Oracle OpenWorld. Schwartz said, "Everything we do is related to virtualization, even if it's in the field of storage. ...Other people throw around big numbers, so, hey, it's a $2 billion investment."

Sun committed itself to purchase MySQL AB, the Swedish company that built the open source MySQL database, for $1 billion on Jan. 16. Actually, it agreed to buy MySQL for $800 million in Sun stock and committed itself to $200 million in "options," the details of which have not been disclosed. So the upfront purchased price appears closer to $800 million.

"We will fund a big portion of the MySQL deal expense from cash," said Michael Lehman, Sun's chief financial officer.

The specific cash figure Lehman used was a projection that the purchase will lead to "a one-time charge in the neighborhood of $40 million to $50 million," which will be taken in Sun's current third quarter, if all goes according to plan. Since most of the acquisition is via stock, the $800 million price is a close match to the amount of stock Sun intended to buy back this year. It's been engaged in a $3 billion repurchase program and has completed $2.2 billion of it, with $800 million to be purchased in 2008. In other words, Sun intends to buy back an amount of stock equal in value to what it will award to the owners of MySQL AB.

The MySQL acquisition will add 1% to revenue in its fiscal 2009 year, while amortizing the purchase will drive down net income by 1%. In fiscal 2010 and after, "we expect the impact will be positive" on Sun's bottom line, Lehman said.

Lehman said 40% of Sun's revenue now comes from "services," by which he meant primarily software and consulting and training services.

Sun executives such as Schwartz emphasized Sun's appeal to young Internet companies and companies in "emerging" economies in Russia, India, China, Southeast Asia, Africa, and Central and South America because Sun's revenue there is growing at a faster pace than in the United States. While U.S. growth is locked "in single digits," Sun's revenue from Russia is growing at a rate of 66%; Brazil, 31%; Mexico, 20%; India, 26%; China, 18%; Europe and the Middle East, 27%; and Korea, 13%.

Sun executives are pleased to point to the rapid overseas growth because more than half of Sun's revenue now comes primarily from economies outside North America. Sales in the United States and Canada amount to 40% of revenue, said Schwartz at the press event Wednesday.

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