November 13, 2002 5:01 PM PST

IBM bullish on new year

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IBM expects a return to growth in the coming year thanks to the company's efforts to realign its business in 2002, executives said Wednesday at Big Blue's annual fall meeting for financial analysts.

"The street's current average for revenue expectations sees us getting back to some growth," said IBM Chief Financial Officer John Joyce, "and in light of the current (U.S. gross domestic product) estimates, we think that's a reasonable outlook."

"We are going into 2003...in a very, very good position to gain" market share, Joyce added.

After a series of moves that included 15,000 job cuts, divestitures of businesses, such as its hard disk drive operation, and the $3.5 billion purchase of consulting giant PricewaterhouseCoopers, IBM believes it is back on track after suffering a business slowdown in early 2002.

Six IBM senior executives touched on the company's current and future business efforts, including its new On-Demand computing initiative, during the meeting in New York.

But Joyce stopped short of giving any detailed information on IBM's financial outlook. He declined to update the company's forecast for the current quarter, its fourth, or to provide analysts with a percentage number representing IBM's growth expectations for the new year.

"For me to stand here today, given what's going on in the marketplace, and predict high single digits and whatnot...I'm just not going to do that," Joyce said. "There have been a lot of people who have made predictions lately, and they've not been correct."

IBM previously said it expected a 10 percent to 12 percent increase in profits during the fourth quarter.

Financial analysts expect Big Blue to post a profit of $1.30 per share for the fourth quarter on revenue of $23.2 billion. For the year, they expect IBM to turn in a $3.91 per-share performance on revenue of $80.69 billion.

As far as 2003 is concerned, four analysts who issued reports on IBM this week expect the company to post earnings per share of between $4.25 and $4.35 per share, an increase from this year's figure, but still below 2001's $4.59 per share profit.

The IBM executives used the meeting to update analysts on the company's plans to continue to cut costs while focusing on boosting market share in areas such as servers and microprocessors. The company will also continue to outsource and make acquisitions where necessary, they said.

IBM will build many of its future efforts in hardware, software and services around its On-Demand computing strategy. The On-Demand initiative pairs IBM technology, such as autonomics, with things like grid computing in an effort to build larger, more reliable computer networks that let companies buy computing power as a service or a utility, not unlike the way those companies purchase electricity.

IBM is also realigning existing product and services offerings around the initiative. The computing giant has already established a new On-Demand group and committed $10 billion to bringing the initiative to fruition through research and development, acquisitions and various company programs.

Our "first priority is to take a look at our core processes," said Linda Sanford, head of the On-Demand initiative.

IBM will also offer new services based on the capabilities acquired in the purchase of PricewaterhouseCoopers. Ginni Rometty, general manager of IBM Consulting Services, said Big Blue is on track with its integration of PwC, with the next milestone--the melding of the companies' two systems and various business practices--on schedule for completion by Jan. 1, 2003.

In the future, IBM's services group will focus on new kinds of outsourcing deals, which its calls Business Transformation Outsourcing. These will include the outsourcing of business processes as well as the infrastructure and applications needed to support them, Rometty said.

Meanwhile, IBM's Technology Group will continue to execute on its new strategy, which focuses on design and manufacturing of custom chips for outside clients, executives said.

IBM is also managing its costs, the company said. Big Blue is on track to save more than $5 billion in costs in 2002 by better managing its supply chain, according to executives.

As a result, Joyce said, "we think we are well positioned to be the one company that can pull it all together. Over the long term, we believe IT spending can be greater than the GDP."

Going into the meeting, most analysts seemed to agree that Big Blue is headed for a bullish year.

"The big changes that IBM has made in services (and software) are paying off, which will help differentiate the company and its business model in the future," Walter J. Winnitzki, an analyst with First Albany, said in a report Wednesday.

"We have made the case that business models in the overall IT market are bifurcating into two camps and that the best-positioned companies will either be the low-cost commodity suppliers, like Dell, or services-driven vendors, like IBM who are viewed as general contractors," Winnitzki said.

 

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