A Sit Down With The Men Of Sun Microsystems
Tuesday, April 25, 2006
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SUSIE GHARIB: A shakeup at the top of Sun Microsystems didn`t inspire investors today. Shares of the computer company rose only a penny to $4.99 in reaction to news late yesterday that founder and CEO Scott McNealy is stepping aside. Jonathan Schwartz, president of Sun moves into the CEO spot and McNealy continues as chairman. Earlier today, I talked with both McNealy and Schwartz and began by asking McNealy to describe his new role.
SCOTT MCNEALY, CHAIRMAN, SUN MICROSYSTEMS: Well, I have been moving a lot of the management of the day to day operations over to people like Mike Lehman and Jonathan Schwartz for quite a while. I have been spending a lot of time using my position as chairman and founder and kind of old timer in this industry to go open doors. Governments and organizations around the world are using the network not only as an economic tool, but as a social tool for change and to drive education, telemedicine, distance learning, all of those sorts of things. I`m going to be spending a lot of my time opening doors with our largest government opportunities, including the U.S. government, but also the developing countries around the world with an open source story, with a community development, a no lock in approach to getting on the network in a very cost effective and eco-responsible way. So there is a big role there and it`s going to require me being strapped to an airplane seat a lot.
GHARIB: Scott, don`t take this the wrong way, but usually when a company make a change in leadership, the CEO leaves, whether it`s a situation like Jack Welsh at General Electric or Carly Fiorina at Hewlett- Packard. Don`t you think that Sun would benefit by a completely new team at the top?
MCNEALY: I think this company is in great shape. We`ve got $4.4 billion in cash in the bank, 17 straight years of cash flow positive from operations. We just showed a 21 percent growth rate in our last quarter revenues. Our gross margins are improving. Our unit volumes are improving. Customer satisfaction is great. I`m the first one that`s out of here if Jonathan says I`m getting in the way and I`m not doing a good job for the organization. But I believe we`ve doubled down on the leadership at the top of this organization and I feel very comfortable and excited. It`s taken me a long time to find the right guy, develop him and give him a chance to go run the company that I co-founded.
GHARIB: Jonathan and you`re the right guy. You said that you don`t plan to change the strategy at Sun. If that`s the case, how do you plan to get Sun profitable again?
JONATHAN SCHWARTZ, CEO, SUN MICROSYSTEMS: Well, I think that the core strategy of betting on innovation and betting on a vision that says the network is the computer is already paying dividends across the world. We`re seeing the world move online and just this past quarter, we really saw an inflection point in the growth in the company. We`ve posted top line growth more than 20 percent as well as expanding margins and clearly the fundamental economics of the company are sound. The question is now how do we get good consistent growth and good consistent earnings. Sp we are going to be focusing on growth. It`s certainly my top priority. We are also going to be focusing on insuring we expand the margin pool available to drop the bottom line and continue delivering on an overall plan that makes us more efficient, delivers more consistent earnings.
GHARIB: But how are you going to get profitable again? Analysts are saying that Sun has to do serious cost cutting, including job cuts. What are your plans?
SCHWARTZ: Well, I think up until this past quarter, analysts weren`t assuming we were growing to be growing at the rate that we were. So clearly with some growth and holding costs constant and maybe looking to prune in areas where we haven`t seen the return as well as looking at the overall efficiency of the company, there is plenty of efficiency for us to discover, but we also think and bear in mind we are in market that`s going to continue to grow for quite some time to come. We also think there is plenty of top line expansion to go deliver. So, again, if you are looking at a flat declining business, then you obviously are going to go back and take a really hard look at costs. But when your Internet environment, where you`re seeing expanding top line, expanding margin, we want to go take the assets we have, make sure they are on the most productive and most attractive projects and then just go deliver earnings on that basis.
GHARIB: Scott, under your leadership, the focus has been on R&D and engineering. Do you think that Sun has the right business model to return to profitability?
MCNEALY: Absolutely. With growing revenues and an improving gross margin line, we have done a lot to take some of the bubble era excesses in terms of real estate. We have taken out about six million square feet in real estate. We have reduced head count by about 12,500 folks in the last few years. And we are finding lots of opportunity to drive productivity and efficiencies in the business. So we`re not done there and that`s a long, steady march that we are going on in an appropriate way. And Jonathan has driven most of this and the most important thing that we`ve done is we`ve got the best product line we`ve ever had. We are faster than IBM at our high end. We`re lower cost than Dell on the low end. We`ve got one of the operating systems that matter with (INAUDIBLE) that has five million downloads in the last year. We`ve had some stunning market opportunity and as Jonathan says, his job is to go intercept that market opportunity and monetize it.
GHARIB: Jonathan, what about Sun stock? What do you have to do to rebuild investor confidence?
SCHWARTZ: I`m not one that`s going to forecast where the share price goes and what investor sentiment is. I think what investors care about is fundamentally what customers care about, which is that we`re delivering good consistent value and there`s plenty of growth opportunities out there. So I think the best way to go take care of the share price is make sure we keep delighting customers, keep showing not only unit volume growth, but revenue growth and margin expansion And as we do that, the share price will take care of itself.
GHARIB: All right, Scott McNealy, Jonathan Schwartz, thank you very much and best of luck to both of you.
SCHWARTZ: Thank you.
MCNEALY: Thanks very much.
