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IBM chief sees second half rebound

IBM CEO Lou Gerstner kicked off Big Blue's annual shindig for Wall Street analysts Tuesday with an optimistic outlook. Gerstner said the Y2K hangover is history, the second half is looking good and the company's portfolio restructuring will pay off in upcoming quarters.

Gerstner, who presents to Wall Street analysts once a year, covered a wide range of topics, including industry trends, the outlook for business-to-business commerce and the specifics of IBM's vast empire.

The Big Blue chieftain didn’t stray from previous guidance of high single digit revenue growth and double-digit earnings growth for the company. IBM (NYSE: IBM), however, will occasionally post double-digit sales growth.

Here's what Gerstner had to say:

  • On the first quarter and second half outlook, Gerstner reiterated previous guidance and said Year 2000 spending lockdowns hit the company "with a wet fish."

    "Y2K continued to hurt us, but that's over now," he said. "We're putting that behind us."

    Gerstner added that strategic moves such as selling its network business to AT&T (NYSE: T) hurt revenue. However, the second half should be solid for IBM.

    "We expect to produce much better results in the second half," he said. "The fundamentals remain very sound and more than ever I'm convinced we're on the right track."

  • On industry trends, Gerstner threw out his usual zingers. Two years ago, Gerstner said the PC was dead. Last year, he correctly said some dot-coms were doomed. This year, Gerstner said the hype around B2B marketplaces is overdone. Like Oracle (Nasdaq: ORCL), IBM maintains the back-end enterprise resource management applications matter too.

    "E-marketplaces are important, but there's a big difference between making a sexy announcement and driving costs down," he said.

    Gerstner said it will continue to build marketplaces with Ariba (Nasdaq: ARBA) and i2 (Nasdaq: ITWO), but customers are looking for help connecting all the dots.

    The IBM chief also added that storage spending will increase dramatically in upcoming years. Gerstner said the company is well equipped to tackle EMC (NYSE: EMC).

  • On IBM's PC business, Gerstner said "there is a lot to do and a lot more to prove."

    IBM's PC business has been a disappointing for several quarters and hasn't been "one of those glorious high cash flow businesses."

    Gerstner said exiting the PC business wasn't unthinkable, but indicated the company would stick with it. He also noted that the PC losses for IBM were misleading because the company reports "outside the box" revenue in other areas such as services.

    The company is also struggling with direct sales despite a exit from the consumer indirect channel. Gerstner said it's hard to simply shut down the indirect channel, especially since 70 percent PC sales derive from indirect channels. "It's enormously complicated," he said. "You can't just throw out the indirect channel when you depend on it for sales."

  • On the company's software business, Gerstner said operating systems will continue to shrink as a percentage of revenue. Gerstner said "middleware" is the new frontier and cited partnerships with Siebel (Nasdaq: SEBL) among others. IBM is among the leaders in database software, servers and network management, he said.

    One area of weakness, however, is IBM's UNIX servers. Gerstner said the company practically handed the market to Sun Microsystems (Nasdaq: SUNW), but plans to come back strong with mid-range servers.

    "We were working with half a hand," he said. "We had strong NT and Linux offerings, but not UNIX. We're going to plug that hole."

  • On IBM's services business, Gerstner said it's the best place to be as an information technology company. He said Net services are having a great time hooking up snazzy front-end e-commerce systems, but IBM can step in when things get more complicated.

    "We know how to drive applications much deeper into the enterprise," said Gerstner.

    The same logic applies for Web hosting, he said.

  • On IBM's chip business, the CEO said the company is exiting the dynamic random access memory market and focusing on logic chips. IBM said it is focusing on communications chips and targeting network gear makers.

    "We feel very good about the portfolio and believe the transition was worth the pain," he said. "We're now ready to exploit the e-business opportunity."