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IBM boss: Expect steady growth

IBM shares gained ground in after-hours trading Thursday following the company's annual analyst meeting during which CEO Louis Gerstner reiterated previous sales and earnings guidance and evangelized the potential and significance of the company's booming services business.

IBM (NYSE: IBM) shares moved up to $116 in after-hours trading after falling $1.78 to $115.20 at the close of the regular trading session.

Gerstner told analysts to expect high single-digit sales growth and double-digit earnings growth in the current fiscal year as the company continues its evolution from being predominantly a hardware and software provider to more of a full-service e-business facilitator with a heavy emphasis on consulting and integration services across the information technology landscape.

"Is double-digit revenue growth possible?" he asked during the presentation. "Yes, yes, it is. But at the end of the day, we don't need it for our model," he said, adding that IBM would not "chase revenue at the expense of profits as so many other companies have done in recent years."

In the first quarter, IBM was one of the few technology companies that managed to meet analysts' estimates, pocketing $1.75 billion, or 98 cents a share, on sales of $21 billion.

Gerstner said that was no accident but simply a byproduct of the company's strategy to make services the linchpin of its business plan, a decision that he made shortly after taking the reins in 1993 when the company's profits and sales growth were floundering.

"It was the genesis of the biggest business decision I've ever made in my career," he said. "We quietly established a clear, overwhelming leadership position in the services market, a market that will be the largest and most important in our industry for years to come."

He pointed out that various market research firms estimate the services integration market will balloon to more than $250 billion in the next few years as companies from all industries wrestle with the inherent difficulties of integrating hardware, software, servers and other computer equipment made by different manufacturers into one cohesive unit.

"In the 1970s and 1980s, services were an afterthought," he said. "In the 1990s it became a significant part of a company's business. In the future--which is now--services will be the vessel in which most hardware and software will be delivered to customers. Services will drive all other sales."

More than 50 percent of IBM's sales growth in the first quarter came from its services business, he said. More than two-thirds of the company's growth in his tenure as chief executive has come from this segment.

Gerstner said that IBM's outsourcing sales in Japan improved 24 percent in fiscal 2000 even though Japan's economy grew only 1 percent for the year. This proves "services can and do run counter to economic downturns," he added.

Strong performance
Unlike hardware or software, a services business is not something you can acquire, he said.

"We played a hunch when we committed to services six years ago," he said. "We like the hand we dealt ourselves."

So does Wall Street.

The company's stock has outperformed the Standard & Poor's 500 index more than 16 percent since the beginning of 2000, while outperforming its peers in the American Stock Exchange hardware index by more than 70 percent in this same period.

IBM's impressive performance in light of the swift decline in macroeconomic conditions--particularly in the technology industry--stems from its decision to exit what Gerstner called "$6 billion worth of lousy businesses" and to avoid "silly acquisitions" that competitors made during the Nasdaq's unprecedented explosion in the late 1990s.

"Thank God we got out of the desktop business," he said. "Chasing revenue in a commodity business is really dumb."

Gerstner said the company will continue to focus its research and development assets on network equipment, servers and middleware that link e-business applications to users' operating systems software.

"The fireflies are gone and the real storm has arrived," he said, referring to the unfettered collapse of money-losing Internet companies in recent years.

Ahead of the analyst meeting, UBS Warburg analyst Don Young issued a research note saying "IBM is likely to play a destabilizing role in high-performance Unix server industry as the strategic bet on technology will enable IBM to clearly leapfrog the competition."

Gerstner said last month's $1 billion acquisition of Informix's database business was a "slam dunk" and has already added 5 points of market share for IBM.

"It's right down our alley in a market we're already making strong progress in," he said.

Gerstner nearing retirement?
Some industry pundits suggested Thursday's analyst conference would be Gerstner's last as the company's top dog.

"We don't plan that far ahead here at IBM," he said after Bear Stearns analyst Andy Neff opened up the Q&A portion of the meeting by asking if Gerstner will be around for next year's meeting.

Under his current contract, Gerstner will remain as chief executive until at least March 2002.

First Call consensus expects IBM to earn $1.16 a share in its second quarter on sales of $22.9 billion.

For the fiscal year, analysts are predicting total sales of $93 billion and earnings of $4.85 a share.

The stock surged to a 52-week high of $134.94 in September before slipping to a low of $80.06 in December.

Thirteen of the 16 analysts tracking the stock rate it either a "buy" or "strong buy."

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