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Technology Stocks : IBM -- Ignore unavailable to you. Want to Upgrade?

To: Michael Bakunin who wrote (7626)	4/17/2002 5:41:20 PM
From: Robert Scott Diver	Read Replies (4) \| Respond to of 8218

Up >3% in after hours at this time. Conference call seemed positive IMHO. Any thoughts?

To: Michael Bakunin who wrote (7626)	4/17/2002 6:30:56 PM
From: Arrow Hd.	Read Replies (3) \| Respond to of 8218

The CC just concluded. One of the most detailed I can remember. Numbers came in per the reduced expectation offered during the warning release. Only the microelectronics segment underperformed the warning number. Other comments were: --Focused upfront on the Hitachi announcement. Made a point then and later to illustrate how IBM has eliminated businesses that do not perform to the expectations of the business model. This will be a standalone company and fully integrated using assets from both organizations with IBM owning 30%. --Next was a lecture on the bad press surrounding accounting practices and disclosure as Joyce said he was "astounded" by what has been published and IBM is proud of their practices. --1Q discussion: -----IT is a tough environment with a continued slowdown and deferred or reduced order rates through the period. The last few weeks incurred a critical shortfall. This caused reduced revenue and EPS but they held share. Customers continue to say IT is critical and IBM will increasingly be in these customer's plans. -----Business model is sound with a robust annuity stream to carry the company through tough times. Business model emphasizes most profitable segments and if there are indications that a segment can not perform then they will unload it such as the Hitachi deal today, Networking with Cisco, etc. (are PCs next?). --Finance: -----Hardware numbers down about 25%. This was most glaring number in my mind. Suggested that customer's capacity utilization much higher than normal as customers stretch their hardware assets. Suggests significant built up demand when things turn around. Also mentioned elongated sell cycles and price attrition as problems. Repeated issues about annuity streams, late Q revenue shortfall, deferred or reduced order rate until economy improves. -----Margins on hardware down 8.7 points but up on other segments. --Reporting structure issues: -----Blasted everyone who insinuates that Intellectual Property is not an operational line item. IP is key from a revenue and asset standpoint for any technology company. (opinion: I agree with this assessment since it drives real dollar revenues and earnings. Some tech and bio-tech companies are nothing but IP revenue generators). --Cash and debt: -----Cash was somewhere around 4 billion on hand and something like 7 billion generated over last two years. -----Debt issue was another blast at those who write that IBM "leverages its balance sheet". Detailed discussion about IBM Global Financing and why a leasing business runs up a company's debt but if you strip out the leasing business IBM has "virtually no debt". Need to look at it as two different businesses and assess on a more sectored basis. --Services: Strong 4Q, 1Q and projected 2Q bookings suggest the second half could return IBM to double digit performance in services. Lot of Qs on this in the Q and A. --Technology and storage: -----Inventory about right going forward. IBM is leader in custom chips. New products now shipping. Bad news was quarter was weak with Microelectronics down 42% and OEM storage down 29%. --Software: -----Generally positive with 3% growth. Gaining share in certain areas and significant annuity stream along with IBM Global Financing, Services, and Maintenance. --Issues discussion: -----Focused right on the EPS growth issue as discussed in the press. Agreed that a few years ago EPS growth was fueled by share repurchases, Tax rate management, and the pension fund gains with currency translations sometimes working in IBM's favor. But now this is a smaller and smaller contributor. And things like share repurchases is operational and good financial management, better than chasing some dot.com dream. -----Key measurement is cash flow. Free cash flow some 7 billion in last two years. Also pointed out that some 3.6 billion in revenue was lost due to discarding businesses but this leaves IBM with more profitable revenue. Showed that IBM is growing with the industry by comparing IBM's total profits to seven other IT competitors with IBM equaling all of them combined. -----Concluded this discussion by emphasizing that EPS increasingly from operations, IBM is constantly evaluating its segments and moving to the most profitable segments in the IT industry, and its model is sound. --Conclusion: -----2H improvement is tough to call. Visibility statements lacking but Joyce said that the new reduced estimates for 2002 from the earnings warning release are makeable. IBM will focus on holding share and reducing cost/expenses to be in line with revenue and earnings. So the bar is reset but the conviction is there. The Q and A session was uneventful which in a way was a positive because no one had much to pick on. This was a very detailed presentation and was also forceful. I think the analysts liked it but due to the reduced numbers per the warning release it would be reasonable to see reduced share price targets. But I am not sure there will be wholesale ratings changes and some who have lowered ratings now may even come up a notch. It will be interesting to see how it opens after trading up some after hours. The above was a best efforts to relay what I heard on the CC and where opinions are offered I tried to note them as such.