Gerstner: IBM has six months to prove itself again

What turns around goes around, as the Great Magician might have said...

Lou Gerstner wrote to IBM employees yesterday saying: "As I see it, we have two quarters - 180 days - to prove that the second half of 1999 was an aberration, not the beginning of a trend." His concern about the rather miserable results that IBM turned in this week - revenue down nearly 4 per cent in the quarter compared with the year-earlier quarter and just a 7.2 per cent growth in revenue for FY1999 ($87.5 billion) was in fact better than current expectations. He had made gloomy remarks in October at the end of Q3 about the anticipated downturn resulting from Y2K. Net income was down 11 per cent on the quarter, with net income for FY1999 of $6.3 billion, up 7.7 per cent on the previous year. In the end, the results bettered expectations by six cents, largely because of better expense control. The outlook for Q1 is for earnings to be flat or slightly down, but Q2 is expected to pick up. The forecast for the present FY is that earnings will be up 18 per cent on 1999. Gerstner's remarks probably influenced the pre-trading markup of nearly $4 on Instinet overnight, and an additional $3 in early trading today, to $122. This is still some way below the 52-week high of a shade under $140. IBM seems to be doing well with its e-business, with revenue up 60 per cent for the year. However, revenue for the Americas was down 4 per cent, and for EMEA down 15 per cent, but Asia Pacific was up 12 per cent. Hardware revenue dropped 11 per cent (but was up 5 per cent for the year), although Netfinity, ThinkPads and RS/6000 mid-range increased "significantly". Storage declined as a result of competitive pressure, with the exception of Shark. So far as S/390 was concerned, MIPS shipments declined 38 per cent, and the AS/400 suffered from weakness in the ERP sector. Personal systems revenue and profit declined, partly related to component supply and memory cost. Global Services, after allowing for the sale of the IBM network to AT&T, was up only 2 per cent for the year-earlier quarter, but made 11 per cent for the year. This was clearly Y2K-related, with John Joyce (named as CFO two months ago) noting in the analysts' call that some 10 per cent of global services' work had been Y2K related. The slack is however likely to be taken up with additional e-business services and emerging product offerings. Nonetheless, 35 per cent of IBM's pre-tax profit comes from services. IBM is increasingly running up against HP, Andersen and EDS as it does VC investments in start-ups through its next generation initiative. Software revenue also grew overall by 2 per cent for the quarter and 7 per cent for the year, although middleware was up 8 per cent for the quarter. IBM defines its middleware to be WebSphere, MQ, DB2, Lotus, Domino, Tivoli, and SecureWay. AIX has apparently been doing well on the RS/6000 S80 enterprise servers, and the IBM Linux initiative has been accelerated. IBM's cash at year end was nearly $9 billion, with debt of $1.6 billion. It is always surprising that interest rate fears usually affect tech stocks as much as the others, even though relatively few high-tech companies have net debt, and many stand to gain from higher interest rates. Currency fluctuation had a significant impact in 1999 because of the fall of the Euro against the dollar. ®

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