David Thomas, general manager of the PC division, discussed the lost sales of Netfinity servers and ThinkPad portables in a memo sent to employees yesterday. He also said the group, which makes commercial and consumer PCs, portables and PC servers, will cut costs by $1 billion this year. In the second quarter the division lost $69 million, down from a loss of about $169 million in the previous quarter.
The shortages are expected to continue through the end of August, affecting third-quarter profits during a seasonally strong selling period.
The trouble hits just as Armonk, N.Y.-based IBM had been making progress digging its PC group out of a dark hole of unprofitability. Netfinity and ThinkPad are the division's only money-making products.
Last week, CNET News.com first reported the ThinkPad shortage, which had 79 out of 108 configurations back-ordered until August.
"IBM is having some supplier issues and some component issues. And they have led me to believe by the end of August it should be all cleared up, and for their key customers it should be cleared up in the next two weeks," Technology Business Research analyst Bob Sutherland said.
But analysts warn that the effect on Netfinity is potentially more serious, as the servers tend to be the higher-margin, higher-profit items that not only add to the bottom line but contribute to sales of other products, such as PCs and software.
The third quarter is a particularly good time for selling servers "because that's when a lot of corporations and governments do a lot of spending and upgrading," Piper Jaffray analyst Amir Ahari said.
Federal agencies, for example, go on a buying spree, trying to exhaust their budgets before the fiscal year's Sept. 30 close. Agencies' budgets are typically cut by the amount left in their coffers at the end of the fiscal year, so they try to spend it all.
A larger problem is lost sales to dot-coms and to Internet and application service customers, which typically place new orders for servers daily. These companies depend on small footprint servers that can be stacked in racks fit into tight spaces.
Although IBM chief financial officer John Joyce said in a conference call last week that Web server sales grew 30 percent year-over-year, the problem has hurt sales of Nefinity A100 servers introduced in March.
Some competitors may already be benefiting from IBM's problems. On June 5, Compaq Computer introduced the ProLiant DL360, a small dual-processor server targeted at Internet and application service providers. Demand caught Compaq by surprise: The company sold 24,000 units before the end of the month.
Analysts say it's too early to tell how much, if at all, Compaq benefited from IBM's supply problems.
Officially, IBM this week positioned the problem as part of the larger ongoing shortage of components affecting all PC manufacturers. Cell phone demand, for example, has made notebook CD-RW drives nearly impossible to buy because of a scarcity of capacitors used in both products.
But in last week's conference call with financial analysts, Joyce blamed the problem on motherboards used in ThinkPad and Netfinity.
"The problem doesn't affect the entire motherboard, and we don't even have a name for the specific kind of component, but it is unique to IBM products," an IBM representative said.
The problem apparently has to do with production changes made by the component's supplier, creating a shortage of motherboards used in both the ThinkPad and Netfinity.
"A worldwide team is working to solve our immediate supply problems, meeting several times a week, and we have people working on-site with suppliers to maximize output," Thomas wrote in yesterday's memo. "For the longer term, we are reviewing our mix of suppliers and how we work with them to make sure we don't get caught short again."
Thomas later this week is expected to hand his job over to Robert Moffat before leaving IBM to pursue other interests.
Moffat comes from IBM's manufacturing division and is expected to draw on his expertise dealing with suppliers to prevent future problems of this kind, International Data Corp. analyst Roger Kay said.