-- IBM microelectronics division has profits in sight --
By Caroline Humer
NEW YORK, Dec 9 (Reuters) - International Business Machines
Corp.'s <IBM.N> technology group is poised to turn a profit for
the first time this year, helped by job cuts, a restructuring
and a year-end pick-up in microchip sales.
The $5 billion group accounts for only about 6 percent of
IBM's annual revenue but is one that investors watch closely
because it is often the swing factor when it comes to IBM's
ability to meet or beat quarterly earnings forecasts.
This year, microelectronics has been a drag on the Armonk,
New York-based computer services, hardware and software
company, with operating losses totaling $1.1 billion so far.
IBM Chief Financial Officer John Joyce told Reuters in a
recent interview that, with the technology group's losses pared
down to $17 million in the third quarter, the division is
aiming for profits not only this quarter, but throughout 2003.
"You should see the technology group contribute for the
year," Joyce said.
That's important because IBM is bringing a new chip plant
online next year. It'll derive revenue as it lets outside
companies make chips there, but it will also have new costs for
depreciating certain assets as it goes into production.
The plant is starting up amid uncertainty about 2003
industry demand.
"While we are anticipating some growth, it's very, very
modest," IBM technology group executive John Kelly said in an
interview.
Microchips, or semiconductors, are used in everything from
electronics to telecommunications equipment. IBM makes all
types of chips, including the microprocessor, which is the
brains of the personal computer.
Global sales of semiconductors fell 30 percent in 2001 to
about $140 billion and are seen rising only 1 or 2 percent this
year, making it the industry's worst downturn ever. The decline
follows a record $200 billion in sales in 2000.
IBM announced a massive expansion in its chipmaking efforts
just as that downturn began in October of 2000, with plans to
invest $5 billion. About half of that was earmarked for a
state-of-the art facility in East Fishkill, New York.
It said then that it could not meet the "white-hot" demand
for its custom chips.
As the downturn took hold, the division began losing money.
IBM responded by cutting its headcount by about 22 percent to
15,500 and shutting some older chip capacity.
IBM focused its technology business on chips, making a $2.2
billion deal to sell off the other part of its technology
group, hard-disk drives, to Hitachi Data Systems. That deal is
set for year end.
And it has repositioned that big bet on chips, with the
majority of its new plant expected to be used to make chips for
other companies. Its other focuses are proprietary PowerPC
microprocessors and customized microchips.
It also has funded a separate services group within the
technology division aimed at chip-design and engineering
services, such as designing components and helping other
companies improve their chip production rates.
IBM's plan may pay off this quarter, helped by a small
recovery in the semiconductor sector. In the past year,
industry-wide sales have crept up and are expected to rise 1 or
2 percent in 2002 from 2001.
News from other chipmakers bodes well for IBM. Last week
microchip makers Intel Corp. <INTC.O> and Advanced Micro
Devices Inc. <AMD.N> said that fourth-quarter sales would be at
the high end of their expectations.
"I think what you're seeing out of some of the other
vendors out there talking about revenues running a little bit
higher than expected in general is the same thing that IBM in
fact is seeing," Lehman Brothers analyst Dan Niles said. He has
a buy rating on IBM.
After this quarter, demand in the semiconductor industry is
more uncertain due to weak corporate spending on technology.
Chip industry growth estimates for 2003 range from 9 percent by
market research firm IDC to about 20 percent by the
Semiconductor Industry Association, an industry group.
Joyce said that the first quarter could prove to be tough
for the semiconductor industry, traditionally its weakest
quarter. He said, however, that he expects IBM's technology
group to do better than in the first quarter of 2001, when
microelectronics lost about $139 million.
Kelly expects to increase revenues in part through more
deals like the one it signed recently with Chartered
Semiconductor Manufacturing Inc. <CHRT>. Under that agreement,
IBM will share certain chip-making technology and make chips
for Chartered's customers, helping to fill its new plant.
"I think there are probably other companies out there that
would like to have a similar arrangement with us," Kelly said.
"Obviously we can't have unlimited number of partners because
these are very deep partnerships. We disclose a lot of
technology to them," he explained.
That's a big change for the company that built its business
on a proprietary mainframe computer, one investor said.
"At one point everything was in-house to IBM. They wouldn't
be sharing it. But now they are being more open, for a reason
-- to make money off of it," said Fifth Third portfolio manager
Sunil Reddy. He said he is a buyer of IBM shares.
((Caroline Humer, New York Technology Desk, 1 646 223-6180,
caroline.humer@reuters.com))
(C) Reuters 2002. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing or similar means, is expressly
prohibited without the prior written consent of Reuters. Reuters and the Reuters
sphere logo are registered trademarks and trademarks of the Reuters group of
companies around the world. |
