Very impressive article from WSJ:
NEW YORK -- International Business Machines Corp.'s chairman, citing
strong demand for computer services and a flourishing components
business, told analysts to look for double-digit percentage revenue
growth during the next several years despite recent lackluster results.
Louis V. Gerstner Jr.'s bullish signal comes at a time when the
computer giant's most recent quarterly revenue growth, about 6%,
came in lower than the 8% or so that IBM has said it believes is
consistently achievable, before adjusting for currency fluctuations.
Without those adjustments, IBM's recent
revenue growth has been sluggish, in part
because of the effect of the strong dollar in
depressing the value of overseas sales. It
rose 3.4% in 1997, down from 5.6% the previous year, and well off the
12% growth of 1995.
Mr. Gerstner has always maintained that IBM, because of its size, won't
grow as fast as smaller rivals. But he led analysts through a unit-by-unit
analysis of the company and made a case for how he can produce
growth rates, in constant-currency terms, beyond the high single-digit
percentage increases the company has been promising.
"The operative words are longer term," Mr. Gerstner said. "Don't run
out of here and change your 1998 [financial] models."
In his fifth annual session with analysts, a jovial Mr. Gerstner led what
seemed more like a fire-side chat than a formal presentation. About
250 industry analysts attended the session while around 250 more
listened on the phone.
Some analysts liked what they heard. "It was good to have a singular
focus on growth, which is the uppermost issue that investors have,"
says Steven Milunovich, an IBM watcher at Merrill Lynch. "I don't think
he moved the needle too much on hardware business but the idea that
the company could grow at double-digit rates just with services is
interesting."
Mr. Milunovich said such talk might spur analysts to revise their
numbers for the year 2000 and even for the second half of 1999.
Mr. Gerstner's talk came after the 4 p.m. close of primary trading on
the New York Stock Exchange Wednesday. Earlier, IBM's shares rose
$1.625 to $121.25, slightly off their 52-week high of $122.75. In
composite trading, the shares closed at $121.875.
Mr. Gerstner said the company's recent problems, including
personal-computer pricing pressure, weak Asian markets and currency
fluctuations, remain well in force. "I am not going to tell you any of
those problems have gone away," Mr. Gerstner said, urging his
audience to "look out a few quarters."
He spent a good deal of time discussing the prospects of IBM's
services business, which has been growing much faster than the
industry overall. But as IBM's services portfolio grows -- it accounts for
25% of the company's $78.5 billion in annual revenue -- there has
been concern IBM won't be able to crank up that business as fast as it
did in recent quarters.
"There are a lot of people in IBM who tell me we can't sustain this 20%
plus growth [in services]," he said. "I am not ready to accept that. Over
the past 30 years as a consultant, as a manager, as a board member, I
have been in and out of every industry in the world. I have never seen
a better growth business than the information-technology-services
business."
Most analysts have expected services to continue to grow in the high
teens. Mr. Gerstner told them that even if they stick to that model, the
sheer growth in services demand will lead IBM to double-digit revenue
growth overall. Among reasons for his optimism, he said, were IBM's
recent wins of computer-outsourcing contracts in Japan, a potentially
huge market where companies have historically kept work in house,
and a backlog in services contracts that stands at $44 billion.
Mr. Gerstner highlighted the Armonk, N.Y., computer giant's thriving
component-hardware unit, which sells hard disk drives and chips to
other computer firms. That business grew 22% last year to $5.6 billion,
fueled in part by technological breakthroughs such as "giant
magneto-resistive" hard drives, which sharply expand the storage
capacity of disks.
Though IBM's revenue has been growing in single digits -- it was up
1.8% in the first quarter -- the company has pleased investors by deftly
producing double-digit per-share earnings increases, largely by buying
its stock and managing expenses, such as the taxes it pays. Mr.
Gerstner said that game plan isn't changing.
In his review of other IBM units, the chairman singled out the software
division for special praise. While the division's revenue was up only 4%
in 1997 to $12.8 billion, Mr. Gerstner said "one of the things I am most
happy about in IBM is that software has emerged as a major business
for IBM."
Reviewing IBM's hardware business, Mr. Gerstner acknowledged that
the market for computer servers is "a tough one [where] we haven't
answered your questions about our performance."
In a brief question-and-answer session, Mr. Gerstner indicated that
IBM's acquisition strategy was primarily focused on software and
services companies, and not hardware, setting at rest speculation that
IBM might buy a network hardware provider or a PC company to beef
up these two areas of weakness. |
