Technology

IBM Laughs Last

Big Blue has been one of a handful of tech firms to buck the weakening economic trend. How long can it hold out?
Joseph RadiganJanuary 19, 2001

(Editor’s note: “Today in Technology,” will cover the corporate technology market on a daily basis. Comments are welcome. Send E- Mails to [email protected])

IBM may still be the largest computer company in the world, but for years, it hasn’t gotten any real respect.

Every so often, an industry analyst or some other objective observer will compliment Big Blue’s e-commerce strategy or the strong revenue in its services and consulting businesses. Once in a while, someone will even say something nice about CEO Lou Gerstner and how he saved the company from oblivion.

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But it’s been years since IBM has been the trendsetter for the rest of technology industry.

Well, think again.

Perhaps, IBM will never regain the stature it had from the 1960s through the mid-1980s, when all computer roads led to Armonk. But the company is on something of a roll, and this week, when it released its fourth quarter earnings, the evidence was plain to see.

The company’s earnings grew 28 percent to $2.7 billion on modest sales growth to $25 billion. For the year as a whole, IBM earned $8.1 billion on $88.4 billion in sales.

As a percentage, IBM’s actual growth rate was hardly staggering. But keep in mind, Wall Street wasn’t expecting much. So IBM had relatively easy targets.

But more to the point, most tech firms have been struggling to the finish line, and this time, it was stodgy old IBM that coasted to the wire.

There have been other tech firms that have at least met expectations this quarter. Microsoft, Sun Microsystems and Commerce One all came out with solid earnings reports. But Microsoft also gave an ominous forecast that a slowdown in PC sales and a weak corporate technology market will be a drag on its performance in 2001.

Sun is also less bullish on its outlook for the year ahead. The company has scaled back its annual forecast for sales growth to the 30 percent to 35 percent range from the mid-30 percent range. The adjustment is slight, but it’s part of a pattern of the extra caution most tech firms now have.

But there seems to be little caution in the forecasts coming from IBM. During the company’s conference call with securities analysts, CFO John Joyce said he was comfortable with Wall Street forecasts that the firm’s per share earnings in 2001 will rise 12 percent to $4.99.

Joyce also told the analysts that IBM is “entering 2001 with some momentum and a sense of confidence.” The confidence may be well justified. IBM reported solid gains across all of its product lines, including mainframes, software, services, PCs and storage equipment.

Once again, there are plenty of firms whose absolute rate of growth is greater than IBM’s, and Sun is one of them. But most firms are scaling back their forecasts. IBM is sticking to its guns.

It’s worth considering some of the areas where IBM experienced solid growth and how significant the solid results are for each one.

Mainframes are supposed to be the dinosaurs of the computer industry, right? This is the Internet age, remember?

Also, for many years, IBM’s mainframe business moved in lockstep with the economy. During times of economic expansion, mainframe sales soared. When the economy shrank, IBM’s Big Iron tumbled right along with it.

This time around, the global economy may be on its shakiest ground in years, but IBM is entering the downturn with a strong backlog of orders for new equipment. Big Blue may ride this one out.

IBM virtually invented the PC market 20 years ago. Oh, the Apple II and the Altair may have preceded it, but IBM’s original Personal Computer created a mass market. The rest is history.

But in recent years, leadership of the PC market had been grabbed by rivals like Compaq Computer and Dell Computer. IBM’s PC business was losing so much money that Wall Street urged the company to sell it. Now it’s profitable.

Finally, storage equipment. Here’s another market IBM literally created. The first hard disk drive was built by IBM engineers. But in recent years, IBM has seen the market for high- end mass storage equipment gobbled up by EMC.

IBM’s own mass storage products have struggled to hang on. While IBM may not recover the ground it lost any time soon, its storage products were part of a hardware segment that enjoyed healthy revenue growth of 10 percent to $11.4 billion in the fourth quarter.

So what’s the verdict? Is IBM going to sail along smoothly, while every other technology company sputters? That’s not likely, especially if the economic downturn proves to be severe. Eventually, Big Blue will get caught up in the downdraft, too.

But IBM’s latest financial performance underscores just how unpredictable the technology market is. It also says, more strongly than anything else could, that while young tech start-ups may create the most innovation and excitement, the big, global suppliers still have a role to play.

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