UPDATE: Schwartz Replaces McNealy As Sun CEO

McNealy, 51, will stay on as chairman and "full-time employee," whose new role will be to "focus his efforts on Sun's government and academic relationships globally, as well as expand his role with key strategic partner relationships." He also will become the chairman of Sun Federal, which focuses exclusively on U.S. government business.

In a conference call Monday afternoon, McNealy called it a "big day for the company and a big day for me." He said Schwartz "has done an awesome job at everything he's done" for Sun.

"He's never blinked in all the time I've known him, and he's executed," McNealy said, adding that the company's product line "has never been stronger."

"I wasn't going to hand it over post-bubble when the thing was deteriorating, but the time is right to go do it now," he said, pointing to market indicators that put Sun in a position for strong future growth, such as $4.4 billion of cash in the bank and solutions in a variety of emerging markets. "The timing fit me to a tee, and it was my call."

In his new role, McNealy will become the company's "chief evangelist," traveling around the world to get Sun's message and strategy to as many partners and competitors as possible.

"We're going to be there for the long haul, and we have a bright, young, passionate and aggressive team to carry things forward," he said.

Schwartz spoke with enthusiasm about assuming his new role.

"There are two reasons that keep you enthusiastic about drawing a paycheck: because you love your job or you love your boss," he said. "I've been in a rare position to have both, and I'm looking forward to the coming 10 years as we pull off the next transformation of Sun."

He said he plans to spend his first 90 days undergoing a comprehensive review of all the company's growth opportunities, its personnel distribution and its technologies "down to the project level."

"We have one of the strongest leadership teams and leadership factories in the industry; we have the quality of our technical assets and an incredible customer base," Schwartz said. "We have some of the most valuable brands on the market, and many of them have yet to bear fruit. We're in a rare market in that the demand for network innovation will never decline for as long as any of us are on this earth."

He said that the mission of the company will not change, but in a symbolic gesture, he said the company's top-level executives—including himself and McNealy—will begin sharing offices two people at a time. "This shows how we're driving after efficiency and teamwork," he said.

Sun reported a fiscal third-quarter loss of $217 million, or 6 cents per share, compared to $28 million during the same quarter last year. Company officials attributed the loss to costs it has incurred for recent acquisitions, stock-based compensation and restructuring. Sun's sales grew 21 percent to $3.18 billion, up from $2.63 billion in Q3 2005, but that number missed analysts' estimate of $3.21 billion. The news of McNealy's departure sent the company's shares up 9 percent in after-hours trading.

McNealy has been at the helm of Sun for 22 years. The easygoing executive has alternately been admired and criticized in recent years as his company's fortunes have varied. Alliances with Microsoft and Oracle buoyed Sun's prospects, but it never fully recovered from losing rafts of business after the dot-com bust at the beginning of the decade. For the past few years, industry observers have faulted McNealy for refusing to undergo deep job cuts or a dramatic restructuring that many analysts thought the company needed.

McNealy co-founded Sun in 1982 with Andy Bechtolsheim, Bill Joy and Vinod Khosla, and was named CEO and chairman in 1984. Schwartz joined Sun in 1996 after it bought Lighthouse Design, where he was CEO. He has been Sun's president and COO for the past two years. Although Sun's shares are far below their 2001 price levels, the company has rebounded in the past year, a comeback that many in the financial community attribute to Schwartz's management.