April 25, 2006 6:45 PM PDT

Sun: Same song, second verse?

A correction was made to this story. Read below for details.
news analysis When Sun Microsystems on Monday named Jonathan Schwartz its first new chief executive in 22 years, he and predecessor Scott McNealy predicted more of the same for the company. But that forecast might not come true.

McNealy and Schwartz said Sun's strategy will remain the same even as the former steps back to an active chairman role and the latter takes the company's reins. The Santa Clara, Calif.-based company will preserve its major research and development budget, and a large layoff isn't going to happen, Schwartz said Monday.

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Changing of the guard
Jonathan Schwartz takes the helm from Scott McNealy at Sun

But the executives didn't persuade some outsiders who expect Schwartz eventually will have a different answer to the Wall Street cost-cutting pressure McNealy withstood for years. Sun's stock has been largely stagnant as the company struggled with inconsistent profitability and revenue growth, but Schwartz promised Monday that that would change.

"Jonathan will be more willing to make the kind of merciless cuts that Sun has needed for a while," said Technology Business Research analyst Martin Kariithi. "Their SG&A (selling, general and administrative) costs are 32 percent of revenue. That's way too high. It should be at most half of that. They will have to make major headcount reductions."

Scott McNealy Scott McNealy

Investors have driven up Sun's stock in recent months, but Sanford C. Bernstein analyst Toni Sacconaghi believes the company's valuation assumes a major cut of more than 25 percent of the 38,800 or so employees. "A workforce reduction of 10 to 15 percent (3,800 to 5,700 people) now seems more likely, but may not be enough to satisfy current investor expectations," Sacconaghi said in a Tuesday report.

Schwartz said Sun "prudently and responsibly...diminishes the investments that don't make sense anymore." But he added that "there's no plan whatever" for a major layoff. He preferred to direct attention not toward cost cuts but rather to revenue growth as a way to profitability. "We are going to be just as focused on that latter part of the equation as we are on the former," Schwartz said.

The technology strategy may be perturbed less, though. Indeed, much of that strategy--the widespread effort to make almost all Sun's software open source, for example--already belongs to Schwartz, who spent two years as president and chief operating officer as McNealy groomed his replacement.

And the new CEO already has shaped the high ranks of the company. Two years ago, after Schwartz was promoted to Sun president, he got free reign to pick the executives he wanted. "I'm making the decisions about the leaders that report to me," he said in a 2004 interview about reorganizing Sun's server groups.

Stay the course?
The magnitude of changes required likely will be tied to how well Sun fares in the near and medium term.

McNealy argued that the foundations have been laid for Sun's comeback. "Now, It's just a question of a few minor tweaks to the strategies, some strong execution and some creativity that I think Jonathan brings," McNealy said in an interview Monday.

Schwartz hinted that tactics might change even if the strategy doesn't. "Obviously, the strategy today versus 10 years ago may have the same theme--the network is the computer--but the roadmap is a pretty different beast," he said.

Before stepping down as CEO, McNealy said he wanted to make sure Sun launched the UltraSparc T1 "Niagara"-based servers, the "Galaxy" line of x86 servers and the more traditional servers using the UltraSparc IV+ processor. He also wanted to make sure Solaris 10 became open-source software and that "the Microsoft relationship was working well," McNealy said.

That accomplished, McNealy wanted to let Schwartz reap the benefits with a strong financial finish to the company's fiscal year at the end of June. "The only responsible thing is to let the new guy get all the triumph and glory," McNealy said.

 

Correction: This story misstated revenue generated by Sun's x86 server business. It brings in about $100 million per quarter.

See more CNET content tagged:
Jonathan Schwartz, Scott McNealy, Sun Microsystems Inc., layoff, CEO

 

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