May 15, 2002 3:45 PM PDT

Palmisano's big-picture view of IBM

IBM CEO Sam Palmisano told Wall Street analysts that the company needs to cut costs and become more efficient, but declined to discuss expected job cuts.

"There are other areas of our business that we need to be more efficient in. We know it," Palmisano, who became IBM's CEO in March, told analysts at the company's spring analyst meeting in New York on Wednesday. "You'll hear more about what we are doing to address those issues to get more efficient."

In keeping with a tradition cemented by former CEO Lou Gerstner, Palmisano stuck to the big picture in a presentation lasting about 40 minutes. He outlined IBM's rather upbeat view on its long-term prospects but provided few concrete details. Although he did not discuss any specific plans to reverse IBM's recent financial slump, he strongly indicated changes were coming.

IBM suffered a first-quarter sales slowdown across most of its business segments, which led to lower earnings than earlier estimates.

To right the situation, some financial analysts believe IBM could shed between 8,000 to 20,000 people in 2002, coming from a combination of natural attrition, layoffs and spinoffs, such as a recently announced plan to spin off of its hard drive division. Many analysts expect IBM could begin layoffs as soon as this month, sources have said. IBM employs over 300,000 people.

Going forward, IBM's strategy will focus on gaining market share, lowering costs, improving productivity, and reinvesting in research and development into services, software servers and other high-margin areas, Palmisano said.

"We are using this (slow market) to take share from our competition," he said, noting that IBM's recent gains wrestled away the No. 1 spot from Oracle in the database market.

Meanwhile, when it comes to costs, Palmisano said, "Make no mistake ladies and gentlemen, we are addressing them."

In some areas, action has already begun. The company's PC division "had a business model problem--we weren't direct--and we had a cost problem," he said.

Now IBM has outsourced manufacturing and has shifted to direct sales. About 50 percent of its sales are now direct. "We now have an equation for our PC business that we think is sustainable," Palmisano said.

IBM is also working to exit the hard drive manufacturing business. The company announced in April it plans to transfer its hard drive business to a new joint venture with Hitachi.

But Palmisano gave no other specific details on how IBM will cut costs, something analysts had hoped for.

"We do not think that Palmisano will champion a fundamentally different approach to running IBM's portfolio of businesses. The perennial question at this annual meeting is whether IBM will choose to exit any of its less-strategic or more-cyclical businesses, such as PCs, and there is considerable speculation about whether Palmisano will be more inclined to spin off portions of the portfolio," Toni Sacconaghi, analyst at investment firm Sanford C. Bernstein, wrote in a report ahead of the meeting.

Meanwhile, Palmisano went so far as to say he sees "some encouraging signs" for an IT market recovery. But "no one's going to predict when this is going to turn around," he said.

Palmisano said he remains upbeat about IBM and its future in the IT market, especially about products like servers and services, which can be used to increase businesses' productivity by offering capabilities such as consolidating data in a central location.

"Clearly some of this (IT market slowdown) is a reaction to the economy and some of this is a reaction to overcapacity driven off the dot-com bubble," he said. "But business leaders get it. They understand the importance of digitizing their enterprises to drive productivity.

"Make no mistake...this is a very large industry and there's a lot of growth in this industry," he added. "It will always grow."

When pressed about IBM's Semiconductor division, he said, "We love this business. This is a good business for...our own internal needs."

Though Palmisano admitted IBM has too much manufacturing capacity in semiconductors right now, he said, "We don't have a broken business; we have a short-term economic problem that will turn" around.

 

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