Sun CEO Quits Post As Losses Continue

Sun Microsystems' Scott G. McNealy, one of the longest-serving chief executives of a major technology company and a fierce critic of Microsoft Corp., stepped down from his role yesterday after 22 years but will continue his job as chairman.

Replacing McNealy is 40-year-old Jonathan Schwartz, a ponytailed veteran of the company who joined Sun Microsystems Inc. a decade ago when the firm bought Lighthouse Design, where Schwartz served as chief executive. McNealy characterized the move as part of a long-planned succession at Sun, which makes large computer servers.

"I'm very comfortable and excited" about the change in leadership, McNealy said in a conference call with analysts and reporters in which he also discussed Sun's loss for the third quarter of the fiscal year. He said the decision to step down coincided with the company's annual planning process. "The timing fit me, and it was my call," McNealy said.

The change comes at a time when investors have grown frustrated with Sun's stock price, which has hung around the single digits for years, and inability to turn an annual profit since 2002. Although McNealy said as recently as February that he had no plans to step down unless the board asked him, he said yesterday that he told the board in a conference call Friday night that "the time is right" to step back.

"Sun is trying to execute a turnaround," said Brent A. Bracelin, an analyst with Pacific Crest Securities Inc. Having lost market share to competitors offering cheaper computing alternatives, such as Dell Computer Corp. and Intel Corp., McNealy pushed Sun to invest heavily in research and development. Now, with McNealy stepping aside, Bracelin said, the company is likely to focus on fixing itself financially.

Schwartz said Sun will spend the next 90 days assessing various aspects of its business and finding ways to become more efficient, and he hinted that some of the company's less-profitable units or products would be redirected or eliminated. He said his vision for running the company would not be dramatically different from McNealy's, saying that the company plans to continue to invest in research and development and "intercepting demand" for the huge growth of computing.

One of Sun's founders, the notoriously brash McNealy said he would not turn the firm over to just anyone. "Twenty-two years I've been running this joint, and I'd love to do that more, but we have a great guy -- a guy I've been working pretty hard to get into this role," he said. "I spotted him, put him on our fast track. He and I can finish each other's sentences. We align strategically."

Some analysts wondered whether Schwartz brings enough vision to differentiate himself from McNealy and bring about more consistent profits. After the Internet bubble of the 1990s burst, McNealy helped guide the company away from building computer workstations and into the high-end-server business. But some analysts worry that the company has lost its footing as competitors have eaten away at its market share. Though McNealy has been known for his fiercely competitive style and his public jabs at rival Microsoft, in recent years Sun has formed key partnerships with some of its rivals, including Microsoft.

"The question now is if Sun goes on to do well after McNealy moves on," said Ivan Feinseth, an analyst with Matrix USA LLC. Wall Street will be looking for profitability as proof that the company is back on the right track, he said.

Aside from serving as chairman, McNealy said, he plans to serve as Sun's "chief evangelist" in serving a promotional role in working with the company's key customers. He also said he would take on the title of chairman of Sun Federal Inc., the company's business with U.S. government customers.

Sun announced that it lost $217 million for the three months ended March 26, compared with a $28 million loss in the comparable period a year earlier. Revenue was up 21 percent, to $3.18 billion.

Staff writer Yuki Noguchi contributed to this report.