Update: Sun CEO McNealy steps down; company posts $217M loss

Jonathan Schwartz has been chosen to take over immediately as CEO

Sun Microsystems Inc. CEO Scott McNealy has stepped aside as head of the company, an announcement made on the same day Sun reported a loss of $217 million for its most recent fiscal quarter.

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McNealy, one of the most visible, outspoken and sometimes combative CEOs in Silicon Valley, announced during a conference call to discuss the financial results that Jonathan Schwartz has been chosen by the board of directors to take over as CEO effective immediately.

Schwartz, 40, is McNealy's righthand man and has been long groomed for the top job. He had been serving as president and chief operating officer and has been with Sun for 10 years.

“He’s ready,” said McNealy, 51. He called the leadership change “a big moment in Sun’s history." McNealy, who co-founded Sun, will remain as chairman.

Schwartz promised a "comprehensive review" of all aspects of the company, including its technology and current investments. "We view the opportunity, quite literally, as planetary in scope," he said.

Schwartz put particular emphasis on research and intellectual property development, which now gets about $2 billion in spending annually.

The upcoming review is "not to figure out how to take a whack at head count," said Schwartz, who nonetheless indicated that cuts in some areas are possible. He said the company would be "pruning" those areas that aren't yielding returns.

Schwartz also started making leadership changes, announcing that Sun's chief technology officer, Greg Papadopoulos, would serve as executive vice president of research and development. There will also be a change in leadership style, with an emphasis on teamwork, and Schwartz said he would share an office with Mike Lehman, Sun's chief financial officer.

McNealy doesn't plan on fading away. He expects to spend more time traveling and meeting with customers and will serve as chairman of Sun Federal Inc., which is responsible for Sun’s government business.

The change also does not represent a strategic shift in direction at Sun. Schwartz has served in a range of posts across the company, including head of its software division. When Schwartz and McNealy share a stage to talk about Sun’s products, it’s obvious that they are in sync. Such was the case today on the conference call, as McNealy emphasized their shared outlook by calling himself and Schwartz “highly aligned.”

“The time is right. Our product line is fixed. We're winning benchmarks and awards across the board, [and] our customers are probably happier with us then they have been with us in a long time,” said McNealy.

As far as the financial news goes, Sun's revenue for the third quarter of fiscal 2006, which ended on March 26, rose 21% year over year, totaling $3.2 billion for the period. The revenue figure was buoyed by the company's acquisition of Storage Technology Corp. last August.

The $217 million loss, which amounted to 6 cents per share, included $87 million in charges related to acquisitions, as well as $93 million in compensation and restructuring charges, Sun said. In its third quarter last year, the company lost $28 million, or 1 cent per share.

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Sun has failed to recover from the end of the dot-com boom, and the company has posted a string of losses or near break-even results over the past five years. With its stock also suffering, in recent weeks, there had been growing speculation that a shake-up was coming to the Santa Clara, Calif.-based company.

The company was slow to realize the threat posed by x86 systems but has since worked to change course, developing new servers and increasing the capability of its Sparc systems with multithreaded, multicore chips that run at low wattage.

The change in leaders announced today "indicates that the financial market had finally come to the end of the patience more than anything," said Charles King, an analyst at Pund-IT Inc. in Hayward, Calif. "The company has had a really tough time over the last three or four years."

McNealy has also had a public presence as one of the more visible figures in the industry and has often been outspoken, especially during the company's involvement in antitrust litigation with Microsoft. "In a way, a high profile can be as much of a curse as it is a blessing," said King.

He called Schwartz's appointment "a conventional choice."

"It's a Sun-friendly choice," King said. "He is a new-enough face that I think the investors can probably live with it for a year, but he's really going to be under a microscope."

Rob Enderle, an independent analyst in San Jose, agreed. "This is a stay-the-course signal," he said. "In fact, the real question may be whether there is really any change at all, since the reporting relationships remain very similar, with Scott still basically in charge."

Enderle said Schwartz has "been in this role underneath Scott for a while, so you wouldn't expect much change initially -- particularly if Scott doesn't actually give up much day-to-day control."

Robert McMillan of the IDG News Service contributed to this report.

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Copyright © 2006 IDG Communications, Inc.

  
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