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IBM counting on services for growth

Although Big Blue didn't grow much in 2000, CEO Lou Gerstner tells investors that its services division could help the company recover ground in 2001.

Although IBM didn't grow much in 2000, CEO Lou Gerstner told investors in the company's annual report that IBM's services division could help Big Blue recover ground in 2001.

Services will continue to play an increasingly important role at IBM, Gerstner wrote in the report released Tuesday. In 2000, IBM's revenue and earnings remained relatively static. Hardware even declined as a percentage of revenue. But that means services managed to grow in a tough environment.

"I experience this time with a mixture of satisfaction, confidence and hope," the CEO wrote in his letter to shareholders, published with the annual report. "Satisfaction at IBM having stuck to its guns and gotten things pretty much right. Confidence in our ability going forward to deliver on our promise and to deliver on our customers' needs. And hope about the genuinely transformative future that is opening up before all of us--businesses, schools, governments, entire societies."

Meanwhile, Gerstner's annual salary plus bonuses topped $10 million in 2000, according to the report.

Gerstner received $2 million in salary and $8 million in cash bonuses, according to the proxy statement included with the report.

The CEO received, among other benefits, about $3.5 million in payouts from IBM's Long Term Incentive Program, which awards stock options to senior management based on the company's financial performance over a multiyear period.

Gerstner received the same base salary with a bonus of $7.2 million in 1999. Sam Palmisano, IBM's president and COO, received $797,917 in salary and $1.25 million in cash bonuses in 2000, the report said.

IBM recorded $88.4 billion in revenue in 2000 with an after-tax profit of $8.1 billion. In comparison, the company's 1999 revenue was $87.5 billion with a profit of a $7.7 billion.

Despite the numbers, IBM's traditional products--PCs and large servers--grew only very slightly or fell.

IBM's Personal Systems group, responsible for PCs, notebooks and Intel-based servers, saw revenue grow only 0.8 percent in 2000, compared with a 20 percent year-over-year jump in 1999, the annual report said.

IBM xSeries servers and ThinkPad notebooks saw much larger sales increases, but those were offset by desktop PCs, where revenues were down in part because of IBM's exit from the retail market in the United States and Europe. Personal Systems returned to profitability in the second half of 2000 after losing more than $1 billion in the PC business in 1999.

Revenue from the Enterprise Systems group declined 1.4 percent from 1999, a much smaller loss compared with the 16.9 percent dip in annual revenue in 1999. Here, IBM's pSeries UNIX servers saw strong sales but were offset by iSeries and zSeries servers.

Overall, IBM's hardware businesses accounted for $37.8 billion in revenue in 2000 vs. $37.9 billion in 1999.

Hardware accounted for 42.7 percent of total revenue in 2000, down from 43.3 percent in 1999 and 44.2 percent in 1998.

Global Services, on the other hand, accounted for $33.2 billion in revenue in 2000. Services revenue was up a hair from $32.1 billion in 1999. Services as a percentage increased to 37.5 percent in 2000 from 36.7 in 1999, the report said.

Despite bringing the Personal Systems group back to profitability, IBM continues to move toward being more of a services company. Gerstner called services IBM's "trump card" in his letter to shareholders.

"Whether or not there is a softening of the U.S. economy, IBM should be in reasonably good competitive shape," he wrote. "Of course, we all hope such a downturn doesn't occur. But if it does, the ebbing tide may not beach all boats.

"For one thing, service offerings like outsourcing and hosting are cost-saving propositions for our customers. Services, in this regard, is a counter-cyclical business. And in a tightening economic environment, customers are going to invest in projects that deliver rock-solid, tangible, near-term payoffs, not in speculative, exploratory schemes. As a result, this may be a prime opportunity for IBM to improve its market position."

Gerstner also highlighted a number of other areas as key to IBM's future. They included IBM Microelectronics Division, which supplies processors to IBM products as well as the communications industry.