2HRS2GO: IBM fails to rouse the flock

COMMENTARY -- This is the Gospel According to Gerstner:

"We have learned that despite the hype of the media, there is-no-New-Economy. The Internet is not about the creation of new industries and new institutions. It is only but simply about a very powerful technology that is a tool (emphasis his).

"A tool that will be used to prosecute age-old competitive battles: retailers against retailers, banks against banks, pharmaceutical companies against pharmaceutical companies. It is about who uses the technology to efficiently beat up the other guy. The wars haven't changed, it's just that somebody's invented gunpowder, and whoever uses it first is going to win the next battle.

"So, there will be, of course, some new competitors that will emerge. But by far, this is all about established institutions and companies. It's all about good old down and dirty business. Real. Business. And Real. Business is serious work..."

Lou Gerstner spoke yesterday at the fall analyst conference of IBM (NYSE: IBM), but it wasn't a CEO talking in an IBM hall. Rather, it was Pastor Lou addressing the congregation at the Church of St. Thomas Watson, using all the cadences, changes in pitch and dramatic pauses of a good priest: "...whoever uses it first is going. To win. The next. Battle."

The slight echo that came through the webcast intensified the cathedral impression, as did the speaker's heavy reliance on metaphorical illustrations, especially in the first 10 minutes. Before he mentioned Internet as gunpowder, Gerstner went with dot-coms as fireflies, failed Internet companies as dot-toast and corporate Internet experiments as alchemy. But Pastor Lou was neither flamboyantly prosaic as a stereotypical preacher, nor dry as a bureacratic theologian, but instead came out as a strong homilist, direct and firm. His message was just as straightforward: forget our third quarter stumble, we're looking good for the future.

"What I really want to talk to you about a few minutes here, is the strength of our strategic positioning over the year 2000, because it has been. Very. Significant."

Anyone reading this probably knows the run of IBM's businesses, and Gerstner did little more than to run through their latest offerings and proclaim the rightness of his cause, as already proven by the dot-com collapse.

Unfortunately, for all of his exposition from the pulpit, he refused to face the major question on the minds of the IBM congregation -- the top line. "Some of you are fixated on revenue. Some of you don't understand we have been managing through a transition of seven years, focusing on earnings, cash flow and market share."

The bottom line is great, but the IBM church is so big that it has plenty of levers with which it can tweak earnings. The fact remains that for much of Gerstner's tenure, the growth in IBM's basket collections -- that is, revenue -- has been unimpressive at best.

IBM admitted to some self-inflicted problems in the third quarter, but we only have the company's word that it's been fixed. It's good to hear that the new line of mainframes-as-eServers is selling well, but you would have expected that anyway with a new product line being aggressively pushed. The important question isn't just how many IBM sells, but how many IBM sells relative to everyone else.

Despite the bullish spin of Gerstner and his associates, there wasn't much in that meeting to give anyone the impression that IBM is going to jumpstart its growth to the level of its peers. Granted, IBM has a revenue base far larger than anyone else; nonetheless, certain pieces should outgrow their respective rivals, especially given the enormous resources that IBM can apply.

Yet other than services, the company's business has been stagnant. Gerstner and his team promised -- as they have for the last seven years -- that things will get better in IBM's non-service businesses. But Pastor Lou also suggested revenue grow could be less than 10 percent next year, which would be a disappointment.

Earnings are great, cash flow is great. But earnings merely ensures survival. Investors are fixated on revenue because they want IBM to do more than just hang around -- they want the company to thrive above its peers.

Gerstner wants Wall Street to judge IBM by its bottom line. For a long time, investors did that, but now they judge IBM like any other technology company. They're measuring Big Blue with the same growth metrics used for the rest of the technology industry. And not even a good homilist can change an marketwide trend by himself. 22GO>