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Executives

Bret Schaefer – Vice President Investor Relations

Jonathan Schwartz –CEO

Michael Lehman – CFO, Executive Vice President Corporate Resources

Analysts

Ben Reitzes – UBS

Richard Gardner – Citigroup

Andrew Neff – Bear Stearns

Kathryn Huberty – Morgan Stanley

Bill Shope – JP Morgan

Toni Sacconaghi – Sanford Bernstein

Min Park – Goldman Sachs

Louis Miscioscia – Cowen and Company

David Wong – Wachovia Capital Markets

Keith Bachman – Bank of Montreal

Rex [Crumb] – Dow Jones Market Watch

Sun Microsystems, Inc. (JAVA) F2Q08 Update Call January 16, 2008 4:00 PM ET

Operator

Good afternoon, my name is Kathy and I will be your conference facilitator. At this time I would like to welcome everyone to the Sun Microsystems fiscal year 2008 second quarter preliminary results conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question an answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad. Thank you ladies and gentlemen, I would now like to turn the call over to Mr. Bret Schaefer, Vice President of Investor Relations for Sun Microsystems.

Bret Schaefer

Good afternoon, thank you for joining the Sun Microsystems preliminary results conference call, I’m Bret Schaefer, Sun’s Vice President of Investor relations. With me today is Jonathan Schwartz, Sun’s CEO and Michael Lehman, Sun’s Chief Financial Officer and Executive Vice President Corporate Resources.

With today’s announcement of Sun’s intent to acquire MySQL, we have chose to release our preliminary results for the second quarter 2008 which ended on December 30, 2007 in order to provide more information regarding our current financial position and outlook.

The purpose of today’s call is to discuss those preannounced results for the second quarter as well as to discuss the acquisition of MySQL, which is expect to close in either late Q3 ’08 or early Q4 ’08.

If you wish to hear the replay of this conference call you may log on to our website at sun.com/investors. After the prepared remarks of our call today, we will devote the remaining time to Q&A.

During the course of this conference call we will make projections and other forward looking statements regarding expected future financial results and business opportunities. Our actual future results may be very different from our current expectations. We encourage you to read the 10K’s and 10Q’s that we file periodically with the SEC. These documents contain a discussion of the risks facing our business, including factors that could cause these forward looking statements not to come true. We do not currently intend to update these forward looking statements.

In addition, during the course of the conference call we may describe certain non-GAAP financial measures which should be considered in addition to but not in lieu of comparable GAAP financial measures. Please refer to the operations analysis posted on our website at sun.com/investors for the most directly comparable GAAP financial measure and related reconciliation.

Now, I’ll turn it over to Jonathan.

Jonathan Schwartz

Thanks Bret and hello everyone. It is a very exciting day for us here at Sun. Today we announced our intent to acquire MySQL, the most popular open source entrant and among the fastest growing player in the $15 billion database market. Nearly all of our customers have already chosen MySQL as a platform for the web economy and this acquisition affirms that choice as we bring scale, expertise, support and investment to the MySQL community, its customers, its partners and its employees.

As part of the transaction, Sun will pay approximately $800 million in cash in exchange for all MySQL stock and assume approximately $200 million in options. I expect the acquisition to be accretive to FY10 operating income on a GAAP basis.

So, why did we do this deal? First and foremost to accelerate our growth. MySQL is broadly adopted throughout the world in nearly every company from startup to titan and to the extent anything has held them back, it’s been the resources of a global company, capable of delivering enterprise service and support in mission critical environments and capable of projecting a sales and channel presence throughout every corner of the globe.

With nearly 17,000 folks in our sales and service organization, we’re going to be very focused on accelerating revenue growth from their products on all platforms, but especially across Sun’s products and platforms.

Secondly, the database marketplace is a $15 billion market in which MySQL is one of the fastest growing players, but still under 1% of the overall market. Scaling this business will be a very attractive to Sun and not simply our software business. They bring with them tens of 1,000’s of new customers, millions of new developers and users and the database marketplace has historically been among the most attractive infrastructure markets in the technology industry.

Finally, as the largest commercial open source company in the marketplace, we’ve now assembled some of the most popular and strategic assets at the heart of the web platform. From Luster, used in some of the world’s highest scale high performance computing environments to Java, used in everything from the Amazon Kindle to Sony’s blue-ray DVD standard to most of the world’s mobile handset to the Solaris operating system at the core of network computing across the world.

The addition of MySQL will complete that picture and position Sun to offer a coherent, comprehensive platform to customers seeking to consolidate diverse data center architectures and move to completely open and open source infrastructure. As you can probably tell, we’re all very excited, we think this brings tremendous opportunities to the MySQL user and developer community, growth to our shareholders and an exciting new options, innovation and choice to our customers across the world.

Now I’ll turn it over to my office mate to talk about some numbers.

Michael Lehman

Thanks Jonathan. As you saw in this morning’s press release, Sun’s total revenues for the second quarter of fiscal year 2008 are expected to be approximately $3 billion $600 million dollars, an increase of approximately 1% as compared with the $3 billion $566 million in revenue reported for the second quarter of fiscal year 2007.

As we discussed with you last quarter, we worked with our major US channel development partners and made a change to a sellout inventory model which negatively impacted revenues by approximately $120 million in the second quarter of fiscal 2008.

One highlight for the quarter was net bookings, at approximately $3.85 billion, was an increase of approximately 7% on a year over year basis. Total gross margin as a percent of revenues for the second quarter is expected to be at least 48% an increase of approximately 3 percentage points as compared with the second quarter of fiscal 2007.

GAAP net income for the second quarter of fiscal year 2008 is expected to be approximately $230-$265 million or diluted earnings per share of approximately $0.28-$0.32 as compared with net income of $132 million or earnings per share of $0.15 per share for the second quarter of fiscal year 2007.

This is a preliminary estimate of our second quarter results and we will be prepared to speak in much more detail regarding product performance, margins, geographic performance and the balance sheet on January 24, during our regularly scheduled earnings conference call.

Given today’s acquisition announcement of MySQL, a few words regarding forward looking guidance. We expect the MySQL acquisition to be accretive to GAAP operating income in fiscal year 2010. Upon the closing of this transaction, in either Q3 or Q4 of this fiscal year, we estimate that we will record special or one time charges in the range of $50-$100 million. When we understand the timing of the close we will update our operating income guidance for Q4 of this fiscal year.

Having said that, we are now reiterating our revenue guidance for the full fiscal year 2008. We continue to expect low to mid single digit growth for the entire fiscal year, which implies that we expect revenue growth of at least 5% in the second half of the year. Our operating income guidance for FY09 will necessarily need to be updated to reflect the acquisition accounting adjustment. While we do not expect these adjustments to be dramatic, we need some time to finalize that analysis.

We will update our GAAP outlook for fiscal year ’09 at our regularly scheduled analyst day on February 5. With that I will turn it back to Bret.

Bret Schaefer

Thank you Mike and Jonathan. Before we begin the question and answer session I’d like to request that each of you ask one question consisting of one part, this way we hope to get to most of the questions in queue today. If there is time remaining we’ll be happy to take your follow up questions. Operator will you please start the question and answer session?

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen we will now begin the question and answer portion of today’s call. If you have a question, please press star one on your telephone keypad. You will be announced prior to asking your question. If you would like to withdraw your question, press star two on your telephone keypad. Please wait a moment for the first question. Ben Reitzes from UBS, you may ask your question.

Ben Reitzes – UBS

Boy do I hope you enforce that rule on others. The question I guess I got is that with regard to your guidance for op margins, 8% plus by the June quarter I believe, do those still hold true excluding the acquisition and how are you progressing on your op inc margin expansion plans?

Michael Lehman

That almost sounded like one and a half questions, Ben, it’s Mike Lehman, but with all due respect, as I said the principle reason that we’re not today reiterating the 8% GAAP number is that we need to understand the timing of the close of this acquisition. As I mentioned there will be one time charges or in process R&D and some other things when we close and that will range between $50-$100 million and $50-$100 million are pretty big numbers and the timing of that will impact whether or not we hit the GAAP operating income. So I can say excluding acquisition impact, that’s still what our target is for Q4 but as I said, I want to understand when we close the transaction and as soon as we’ll know that we’ll talk more about it.

Ben Reitzes – UBS

Okay, so excluding all things still hold. Okay, thank you.

Bret Schaefer

Next question please.

Operator

Next question comes from Richard Gardner from Citigroup.

Richard Gardner – Citigroup

Thanks, Jonathan I was just hoping you could talk a little bit about the revenue synergies that you expect from the deal and more specifically, I’m assuming that there are very few if any cost synergies related to the deal so it’s all got to be revenue synergies that gets you to net GAAP accretion by fiscal ’10. What specific areas, how big and how soon I guess are the questions.

Jonathan Schwartz

So, a few things, we’ll talk about synergies as MySQL becomes a part of Sun then synergies as the MySQL customer and user base becomes available to Sun. First, the single biggest impediment to MySQL’s growth has been their ability to give peace of mind to large enterprises that want to put it into mission critical deployment and as a 400 person company it’s tough to give comfort and peace of mind to a 10,000 person company.

But, becoming a part of Sun, given our presence in the global service marketplace and our reputation as really delivering outstanding service in mission critical environments, that becomes something that we can deliver on very quickly and we plan on delivering almost immediately. So our ability to give peace of mind to customers that are eager to put MySQL into mission critical deployment is probably the easiest and fastest revenue synergy for the MySQL business once it becomes a part of Sun.

Now the point is not lost on us that whenever you run a database, whether you pay for it or not, you run it on servers and you buy a lot of storage because databases are after all about storing things and retrieving things. You often also deploy operating systems, middleware infrastructure, application technologies. We clearly serve all of those markets and believe in many ways Sun is a database infrastructure company. It’s to date, we’ve been delivering infrastructure under other company’s databases, now we’ll be in a position to deliver infrastructure under our own.

So quite realistically when we got together to look at where the revenue synergies, the question wasn’t where are they, it’s kind of where aren’t they? Everywhere that we look, there are opportunities for us to expand their reach, expand their scale as well as drive our own infrastructure. So in terms of where we see those synergies, we see them fairly near end and on a GAAP basis we don’t see them delivering an accretive plan until FY10.

Bret Schaefer

Next question please.

Operator

Our next question comes from Andrew Neff of Bear Stearns.

Andrew Neff – Bear Stearns

Sure I just, I know you said you’d give us some geo discussion later but what gives you comfort, you’re basically reiterating revenue guidance given what’s happened in the global economy over the last quarter, I mean you read the same papers that we do, and you’re sort of staying with that. What are you seeing out there just in general and maybe to the extent you could talk about geographic or channel or a vertical standpoint that would be helpful.

Michael Lehman

So a couple of things, it’s Mike Lehman, I’ll start and Jonathan can add as well. There’s a couple things and again we’ll talk more about it next week but certainly the bookings are a good leading indicator, you will also see, and those grew at more than 7% on a year over year basis, we talked about the fact that we have now largely completed the conversion to sellout with our major channel partners and that the impact of that in the second quarter was $120 million, that revenue is frankly going to come back to us in the second half of the year and you will see that that is in our deferred revenue balance at the end of the second quarter. We have one more geography to do in the second half of the year but the impact of that will be less than $40-$50 million, so we feel confident about that.

We feel very good about the products. If you go back to how we talked about this year in the first place, back in July, back in September, we talked about essentially the revenue would be back end loaded during the year, largely due to the timing of new product introductions and because of the conversion to sellout with our channel partners and as you’ll recall we’d really frankly just started shipping our Intel based X60 core products in December and started shipping Niagara 2 in volume in December and we completed the Asia Pac and US channel inventories, the numbers that we talked about, so bookings is the best leading indicator as well as the other things that we talked about.

Jonathan Schwartz

And then maybe just to polish a few of those statements. When the economy destabilizes or when companies don’t do well they look for efficiencies and they look for mechanisms to reduce costs and technology has historically been a great way to achieve both. They also look for new ways of finding opportunity and although I think there certainly has been a lot of commentary on the housing market, I’ve seen no cessation of interest in the internet from among either consumers or enterprises around the world.

So the single best way for us to grow is to create products that people want and the good news is we’ve seen tremendous interest in our new chip multi threading platforms, our new blade platforms are particularly strong, the new Intel product line that’s just beginning to kick into gear, the new storage products are coming into play, the acquisition of MySQL will only serve to promote interest in an awareness of Sun and certainly among emerging economies and emerging companies, we believe our value proposition is really outstanding. So we definitely see growth in the future and feel if anything more confident in the back half of the year.

Andrew Neff – Bear Stearns

And the macro concerns don’t bother you?

Michael Lehman

Of course the macro concerns are bothersome but we’re going to invest in areas where we can find growth and we’re certainly making big geographic investments right now in emerging economies. We are adding to our head count because we see the opportunity and we’re capturing that opportunity so we’re going to grow where we’re growing not to make a tautology but we see the growth, we’re going to go double down on it, we just see it in some sense in every market we see.

Bret Schaefer

Next question pleaser.

Operator

Our next question comes from Kathryn Huberty of Morgan Stanley.

Kathryn Huberty – Morgan Stanley

Yes thanks, Mike do you have a sense yet for how much of the difference between bookings and revenue this quarter as a function of the new systems that only began shipping in the month of December?

Michael Lehman

I don’t have that level of detail yet as I said, once component of that is certainly the deferred revenue associated with the channel inventory. Another piece frankly is typically high end systems that ship at the end of every quarter that are subject to installation and acceptance, et cetera. So by the time we get to next week we will be able to give a better sense of that.

Kathryn Huberty – Morgan Stanley

Great, thanks.

Operator

Our next question comes from Bill Shope of JP Morgan.

Bill Shope – JP Morgan

Great, thanks, I hate to harp on the macro front but I’ll do it anyway, just an extension of the previous macro question, you know in your conversations with customers at the close of ’07 and more recently, I was wondering if you have a sense of how fluid the current 2008 budgets might be. I think we all appreciate the fact that at the end of ’07 it was clearly better than feared, particularly for you all but the concern I think most investors have is that there are still cuts to come and I recognize that Sun may be in a relatively better position than others if that does occur but I’m wondering if you’re getting any sense as to whether budgets are more fluid than they normally have been historically at the start of the year?

Jonathan Schwartz

I think certainly CEOs and CIOs that we speak with are focused on IT and they’re looking at reductions in PCs and printers and employees and all the concomitant infrastructure that comes along with an employee, but they’re just as focused on growing their front office infrastructure to go reach more consumers via the web and they’re just as focused on getting returns from better analytics and better technology deployments.

So we’ve seen a fairly positive impact of virtualization in our product mix and certain we’ve seen more opportunity emerge as customers look for efficiency and look for innovation, that’s what we’re investing in R&D to deliver and that’s in part why we think even with some of the stress in the economy, our products only become more relevant. But simultaneous to that, we’re also going to be investing in places where the economy is just booming and we’ve got a global partner event going on right now, we’ve got 150 or so of our largest partners across the world and there’s just explosive demand in some of the emerging economies and we’re there with it, certainly there with free software and open source software that’s very popular in some of these emerging economies and so we’re quite relevant to those discussions and we expect to convert a lot of that to bookings and revenue.

Bill Shope – JP Morgan

Thank you.

Bret Schaefer

Next question please.

Operator

Our next question comes from Toni Sacconaghi with Sanford Bernstein.

Toni Sacconaghi – Sanford Bernstein

Thank you. Sun has been offering an open source database PostgreSQL for two full years now, ostensibly it’s pretty tightly integrated with Solaris but it would seem to suggest your move today that that was not getting you where you wanted to be and you mentioned repeatedly on the rationale for the deal that really having a large company behind an open source database product was really the key to accelerate growth but you’ve effectively had that in place for the last two years, so can you help us understand, A, why PostgreSQL has not delivered against what you’d like to achieve because ostensibly if it had you wouldn’t have put $1 billion to work here and secondly why you believe MySQL will be so different in its success?

Jonathan Schwartz

Sure, I think you’ve made a few assumptions in your question which I would disagree with. I think if you look at our business we’re all about growing customers and growing communities and offering choice to our marketplace. So we offer choice on the micro-electronics side with our own spark platform the Intel platform the AMD platform. We support Redhat along with Susa along with Windows along with Solaris, we deliver both servers along with storage, we have a very vibrant Solaris ISB community which includes Oracle and Sybase along with Postgres, so the addition of MySQL is the addition of a community and the addition of a market opportunity.

I think clearly we view ourselves as the leader of the open source database marketplace right now and clearly we believe that we want to build as much share in that marketplace as possible and this will add to the share we’ve managed to create and to amplify with Postgres. So for example, Postgres is quite successful in Japan, it’s quite successful in certain types of applications, but it’s not successful in all of them. MySQL is certainly more successful in web facing businesses and some of those online communities and that’s a community we want to add to our customer base, so this is all about our increasing commitment to the open source database marketplace. We’re embracing Postgres and frankly this is evidence that we’re so committed to that marketplace we’re going to put an incremental $1 billion to work and our view is that’s going to yield a rising tide for us, for the Postgres community and for the Sun community more broadly.

Bret Schaefer

Next question please.

Operator

Our next question comes from Min Park of Goldman Sachs.

Min Park – Goldman Sachs

Thank you, could you please elaborate on what the SQL acquisition will mean to you relationship with Oracle over the intermediate term, I’m trying to get a better understanding of why you think the transaction will not have an impact on your revenue generator from that relationship.’

Jonathan Schwartz

So you know as I said before, Oracle is an important ISB in the Solaris ecosystem. We’ve worked together for decades. We plan on continuing to work together. Our customers value Oracle’s presence in the marketplace, but they also value Windows in the marketplace, they also value MySQL in the marketplace. You know we’re going to be there to support our customers, to provide them with choice and innovation. So I think we are definitely looking at expanding the portfolio of choice that we can deliver to our customer and we’re definitely looking to partner with a whole diversity of companies that historically we may not have partnered with, such as Intel, IBM and Dell. So we think there’s opportunity everywhere we look and we’re not interested in closing off any of that opportunity.

Bret Schaefer

Next question please?

Operator

Our next question comes from Louis Miscioscia with Cowen and Company.

Louis Miscioscia – Cowen and Company

Okay, thank you. You know IBM gives their brick revenue at 5% and HP actually gives it at about 10% but also IBM and HP give their mix of SMB at 20% and 33% respectively. I guess can we get these numbers for you and I realize that the quarter just ended and you don’t have all the numbers and it could be either last quarter or your recent fiscal year end or your best guesstimate. Thank you.

Michael Lehman

As mentioned we do not have the geo or market level data today we will have to talk about that next week and to the extent that information is out there for the prior quarters, it’s already on our investor relations website in the data sheets that we’ve handed out. I don’t have the second quarter data and will have that next week.

Bret Schaefer

Next question please.

Operator

Our next question comes from David Wong from Wachovia.

David Wong – Wachovia Capital Markets

Thank you very much. Off the bookings, the great bookings number you reported could you tell us which product segments were particularly strong, were all of them with the book to bill [rate] from one [unintelligible] did some stand out?

Jonathan Schwartz

No there were a few that stood out. Our chip multi threading platforms, the ultra spark based Niagara platforms just had an outstanding quarter. I think our strongest to date, just an exceptional growth, we had a particularly strong close to the quarter with Niagara platform. Our high end systems performed exceptionally well, both on the storage side as well as on the systems side. Our jointly developed systems with Fujitsu were also quite strong. And again we were really impressed with how strong the close of the quarter was. We thought we saw lots of momentum and that gives us a lot of comfort as we move into the back half of the year.

Bret Schaefer

Next question please.

Operator

Once again ladies and gentlemen, if you do have a question, press star one on your touchtone phone. That’s star one to ask a question. Our next question comes from Keith Bachman of Bank of Montreal.

Keith Bachman – Bank of Montreal

Hi guys, thank you. Jonathan this is for you, on the M&A side, you’ve invested $1 billion in the acquisition. Two related questions, I hope Mike Lehman counts as one, as you look at your past acquisition including Storage Tech, what are some of the things that you’ve learned and that like a number of companies I think integrating them is key and some of the track records are a little mixed and secondly, as you think about trying to guide investors, this is a large acquisition, should we think about Sun now looking towards smaller type of acquisitions as you integrate this one or if you could just make any comments on how we should be thinking downstream on your acquisition appetite, thanks.

Jonathan Schwartz

You bet, so maybe I’ll try to answer two questions in the form of one answer. So if you look back at our history of acquisitions there is acquisitions like Thinking Machines, acquisitions of WaveSet, of Afara, you know smaller acquisitions that fleshed out the portfolio and could really amplify and leverage the channels that we have built. To put this in context, MySQL is a very small company, its 400 people and most importantly they’re core product, the MySQL database, is just exceptionally prolific across the world, I mean I encourage you to talk to folks in the IT industry about where they see MySQL, it’s in imbedded devices, it’s on consumer electronics devices, all throughout database applications on clients as well as on servers.

So this is an instance where we’re going to be tucking in a software business into our existing software business and amplifying their product through our existing sales force and that’s something where we’ve got an exceptionally good track record. Storage Tech was different in the sense that the scale of the company was 7,000 employees, they had very, very complex supply chains that we had to do a lot of work to go re-architect, we sold off factories, we really moved their business around, had redundant ERP systems. And clearly the returns form that were more financial than they were necessarily strategic. I don’t think at least now, although that’s beginning to change, that initially Storage Tech was bringing us lots of new customers, I think they were bringing us a different segment of the customers we were already serving.

So this really to us is a springboard to growth. And frankly this is all about not only bringing MySQL into our customer base, where they are apparent today but they’re not really in mission critical deployment and we can accelerate that and then secondarily, it’s about projecting our own products into the existing and quite vibrant MySQL user base. And this doesn’t mean they all have to move to Solaris, it doesn’t mean we’re going to move them off whatever hardware platform they’re on and try to tuck our own products into it, it just means that we can give those users a lot more choice and in essence if you look at our platform, like I said before, we’re a company that’s optimized it’s products for databases so we really have some exceptionally focuses offerings from our CMC platforms to thumper, which is a very high scale storage platform that are really optimized for MySQL as much as they are for the database community broadly, so I see this as a much closer strategic fit, much more amplifying of both company’s businesses and a much more straightforward integration.

Bret Schaefer

Next question please.

Operator

Our next question comes from Rex [Crumb] of Dow Jones Market Watch.

Rex [Crumb] – Dow Jones Market Watch

Hi Jonathan, my thanks for sparing a little bit of time today here. Just really quickly, I’m just trying to, you guys have your full earnings report next week, scheduled for the 24th, why didn’t you guys just put out the full results today instead of next week or why kind of leave us in suspense for another week as you give this range of earnings and revenue today?

Michael Lehman

It’s Mike Lehman and the answer to that is we do go through a process with our auditors where they review the information, they actually look at some of the transactions in certain countries, including the US, so their work is not done and frankly some of the other work that is done in terms of analysis and getting the level of detail that we generally give to people is not quite finished and so this is really about making sure that people understand form a context perspective that the quarter was really solid, all the metrics are going in the right direction and we wanted to set that stage as we talk about the acquisition. It’s really just a matter of timing, we’re not trying to tease you, some of the stuff isn’t done, and our auditors haven’t finished their quarterly work and we’ll be ready by next Thursday.

Jonathan Schwartz

And frankly, our objective was to relieve some of the suspense by getting the data out now just to give you a sense of where we saw strength and where we saw opportunity, but we’re obviously not going to jump the process to get the final numbers out.

Rex [Crumb] – Dow Jones Market Watch

Okay thank you.

Bret Schaefer

Alright, thank you very much, that will be the end of our call today. We appreciate your participation and we are again providing an encore replay service for the quarter, thanks for joining us and you can get back to us at the investor relations main member 408-404-8427.

Operator

This concludes today’s conference call, we appreciate your participation. We are again providing an encore replay service this quarter. If you joined us late or wish to hear any part of the conference call again, you may call the replay service anytime after 3PM Pacific time today to hear a recording of this conference call. The phone number for the replay is 866-501-2970 or 203-369-1831. Thanks again for taking the time to join the Sun Microsystems call this afternoon. You may now disconnect.

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