2008 Ceo Letter To Shareholders

2008 CEO Letter to Shareholders

Fellow Shareholders, In fiscal year 2008, we saw improvements across a number of key operating metrics. On an annual basis, we expanded gross margins by 1.3 percentage points, increased operating income by $63 million, grew products and services deferred revenue by 8% to $2.9 billion, and closed the year with an increase in cash flow from operations of $371 million to total $1.3 billion. In addition, we bought back 151 million shares of our own stock for a total purchase price of $2.76 billion during the fiscal year. Despite this progress, it is fair to say fiscal 2008 was a challenging year for Sun. We were not able to grow our revenue or operating margin as we had planned. Our revenue for the full year was only marginally up when compared to fiscal 2007 — with growth around the world entirely offset by a decline in the U.S., which declined 8% for the year. There is no question the U.S. macro-economic environment had an impact on our customers and impeded our ability to grow the top line, especially in the latter half of the fiscal year. Our historic concentration in some very challenged industry segments such as telecommunications and financial services exacerbated the challenge we faced. That said, we did see revenue growth and progress among the majority of non-U.S. geographies. On an annual basis, Europe, the Middle East and Africa grew 5%, Asia Pacific grew 3% and International Americas grew 16%. More specifically, emerging markets growth accelerated during fiscal 2008 with Brazil growing 20%, Russia growing 12%, India growing 28%, and Greater China growing 13%. I am not satisfied with the operating results for the year, and in the fourth quarter, we initiated a restructuring to more closely align our research and development resources with high growth customer and market segments. We are also currently shifting more sales resources to the emerging economies across the world — where our user and developer communities are healthiest and where our business opportunities are growing most dramatically. Despite the challenging environment, fiscal 2008 brought significant milestones on the strategic partnership front. First, we announced that IBM became an OEM of the open source Solaris 10 Operating System and would resell it on their x86 servers. This was followed by a multi-year OEM agreement with Dell, making the Solaris OS and support services available directly to their customers. Our Intel partnership, which has included a license to OEM the Solaris Operating System since January 2007, brought the introduction of our first quad core Intel Xeon processor systems. On the x86 server front, we saw significant billings growth in blades in fiscal 2008. There were also key milestones in fiscal 2008 that played a central role in positioning Sun for future growth. Most notable was the acquisition of MySQL. MySQL is one of the fastest growing open source databases, with one of the largest user and developer

communities on the Internet. With this acquisition, we acquired an exceptional brand, delivering unique market access to a customer base including many of the highest growth web players such as LinkedIn, and more traditional companies seeking database innovations such as Virgin Mobile France. These customers are among the fastest growing consumers of datacenter infrastructure on the web, acquiring open source software, servers, storage and networking. Another milestone for us was our continued leadership in Chip Multi-Threading(CMT) systems, with the introduction of our UltraSPARC T2 microprocessor, a commodity microprocessor with 8 cores and 8 threads per core. We also debuted our SPARC Enterprise T5120 and T5220 servers — the first enterprise servers to use the UltraSPARC T2 processor. CMT technology represents a fast growing segment of our server line, with billings growth of 84% in fiscal 2008. Throughout the year we again received a number of third party accolades recognizing our technology innovations. Most notable of these, InfoWorld awarded us with three 2008 Technology of the Year Awards recognizing Solaris 10 as Most Innovative Server OS, Solaris ZFS for Best Storage File System and Sun Fire X4500 for Best Storage Server. We were also recognized for our continued focus on corporate social responsibility, ranking among the top five computer companies in Fortune's 2008 Most Admired Companies ranking, and being recognized once again by Ethisphere Magazine as one of the World's Most Ethical Companies — one of three in the Computer Hardware category. You can learn more about our efforts in this area by reading our Corporate Social Responsibility Report, or by visiting sun.com/aboutsun/csr/. Turning to fiscal 2009, growing revenue and expanding profitability remain our top priorities and we will be executing against and investing in four key areas to drive these goals. First, we will target incremental resources in emerging economies to further take advantage of growth opportunities. Second, we will focus on acquiring new customers by leveraging our partners and key software and systems assets. Third, we will align our product development activities to support key market segments that align with our innovations including High Performance Computing, Business Infrastructure and Global Web Build-out. Fourth, we will continue to optimize our open software platforms within our systems to drive commercial sales. The commercial adoption of open source technologies is gaining traction, as enterprise customers continue to face a challenging economic environment and look to open, energy-efficient solutions to address their most serious obstacles, including consolidation, datacenter efficiency, power consumption and virtualization. You can follow our progress in the coming year via my blog (blogs.sun.com/jonathan), our quarterly results call updates and by visiting www.sun.com/investors. I want to end on a note of thanks to all of our shareholders, employees, customers and partners for your continued support in our journey. Sun is the category leader in open source innovation across every aspect of the datacenter, and we will continue to position

ourselves to be the biggest beneficiary by continually innovating through technology, aligning our resources with the highest growth market segments and driving for more operational efficiency. Sincerely,

Jonathan Schwartz President, CEO Sun Microsystems, Inc. blogs.sun.com/jonathan