from Wall Street Journal, October 22, 1999
bolding added by High-Tech East (Ken Wilson)
October 22 1999 - Wall Street Journal, page B1, Marketplace Section - The Real Y2K Problem: Computer Sales, Part 1: Customers Freeze Purchases While They Wait to See What Happens in 2000 ... by William M. Bulkeley and David Hamilton ... abstracted section only, this article not on-line for some reason.
"Sun Microsystems Inc., with a heavy Internet-related clientele, says it is unfazed by any Y2K effect. Sun beat analysts' expectations in the quarter that ended Sept. 26, when revenue grew 25%. Chief Financial Officer Michael Lehman told analysts a week ago that Sun expects revenues in the current quarter to grow 'slightly north' of 20%. Sun officials say it makes sense that they're not seeing a slowdown. Many of their server sales go to Internet-service providers and businesses looking to build an e-commerce infrastructure. "There's still a little bit of uncertainty," Mr. Lehman said in an interview last week, but "we doubt it's going to be a big deal."
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October 22, 1999 - Wall Street Journal, page B1, Marketplace Section - The Real Y2K Problem: Computer Sales, Part 2: As Its Stock Takes a Plunge, IBM gets Sobering Reminder: A Dependency on 'Big Boxes' by Jon G Auerbach
"After a year of bruising growth, Big Blue is suddenly black and blue.
International Business Machines Corp. stunned the market with Wednesday's report of slumping hardware sales and warnings of weaker revenues and earnings for the next six months.
Investors responded Thursday by giving IBM shares a shellacking. IBM stock fell about 15%, or $16, to $91 a share in New York Stock Exchange composite trading. The rout more than accounted for the Dow Jones Industrial Average's 95-point decline Thursday. IBM called it the company's largest one-day stock drop since Chief Executive Louis V. Gerstner took over six years ago.
Based on the stock drop, Mr. Gerstner personally lost about $130 million, while his company lost $29 billion in stock market valuation.
Mr. Gerstner has spent much of the past six years attempting to turn IBM into the Pep Boys of the computer industry -- a company focused on service and parts, with a little software thrown in. But Thursday was a reminder of the fact that IBM remains heavily wed to big boxes.
Hardware is still big enough to screw up your numbers," says Gary Helmig, of SoundView Financial Group. He added that the
disappointing computer sales "are smashing the kneecaps of IBM's revenue."
IBM blamed its hardware shortfall mainly on a buying slowdown triggered by fears over the year-2000 software glitch. Sales of its hallmark mainframes, which generally cost more than $1 million, plummeted 40% in the quarter. Overall server sales dropped about 30%.
Hardware sales account for about 42% of IBM's overall revenues, so any fluctuation can have a profound effect on the company's top line.
In the just-ended quarter, overall hardware sales dropped by 1% to $8.84 billion. IBM also warned of weakness in the current quarter and the first quarter of 2000. Analysts now predict that hardware sales for 1999 will grow just under 5% to about $37.1 billion, well below the 12% growth rate some had been expecting. In the first quarter of next year, hardware should hit about $8.6 billion, about flat compared
with last year's number.
Certainly, part of the problem is Y2K.
Several IBM buyers Thursday confirmed they have slowed down or halted hardware purchases until after the New Year.
But other factors are conspiring against IBM's hardware sales as well.
Most market watchers had estimated that the market for computer servers -- large boxes used by businesses -- would grow by about 4.5% this year. But amid price-cutting and decreased demand, it now appears that the market might not grow at all, according to International Data Corp. "The pricing pressure has been tremendous out there," says Steve Josselyn, an IDC analyst.
Part of the slowdown stems from over-capacity. Over the past few years, many large computer customers have purchased more capacity than they need. In order to conduct Y2K testing on mainframes without disrupting operations, many companies purchased additional mainframes last year and in the early part of this year. Now that most Y2K testing is done, these outfits are using the test mainframes for
regular business operations.
Consolidated Edison Co., the New York utility, spent about $1.5 million purchasing a second mainframe from IBM at the end of last year, according to Robert E. Hedlund, Con Ed's director of technology services. Mr. Hedlund says the computer has plenty of excess storage and processing capacity, and that as a result Con Ed hasn't made any mainframe purchases in 1999. Mainframes "are shipped with enormous capacity, most of which will be turned off," says Mr. Hedlund.
In addition, IBM has been losing market share to rivals, mainly Sun Microsystems Inc. Sun is gaining rapidly in the important market for so-called midrange servers, which generally cost between $100,000 and $1 million apiece. With about 20% market share, Sun is in striking distance of IBM, which had just under 22% share at midyear, according to IDC.
IBM continues to lose money in its personal-computer unit, although the losses are less severe than they were a year ago. IBM said its personal-systems business, which includes PCs, had a pretax loss of $69 million in the quarter, bringing the pretax loss so far this year to $311 million.
Many analysts have pushed Big Blue to get out of the PC business, where it faces fierce competition from rivals including Dell Computer Corp., Compaq Computer Corp. and Hewlett-Packard Co.
Earlier this week, IBM said it would stop selling desktop PCs through retail stores next year, and shift all sales to the Internet. IBM loses money on every consumer desktop it sells through retail channels, says one person familiar with the matter.
Analyst Don Young of PaineWebber says Wednesday's financial results could put pressure on IBM management to either sell or spin off parts of the company's PC business. "It might be the kind of environment to reassess some of the losses," says Mr. Young.
Hardware is especially important for IBM in the fourth quarter because many companies speed up hardware purchases toward the end of the year. Hardware sales generally represent about 32% of overall revenue in the fourth quarter, up from about 20% at the beginning of the year.
Mr. Gerstner, apparently realizing the difficulties of competing in hardware, has worked hard to shift IBM's focus. In the most recent quarter, about 83% of IBM's pretax operating income came from software, services and financing. This is sharply up from about 60% in 1996. Starting about a year ago, Mr. Gerstner began emphasizing sales of computer components to rivals, rather than just computers. The
company has announced deals to sell such equipment as disk drives, chips and computer screens to companies including Dell, EMC Corp. and Cisco Systems Inc.
But selling computers remains an important tool for winning new business. Customers that purchase mainframes or other big servers from IBM often continue to buy hardware and software upgrades over the years. Mr. Helmig says that these add-ons are "very large" in terms of revenue. "Of course hardware is important," he says. |
