"Our biggest problem in global services today is skills," Gerstner said.
Gerstner's comments on IBM's outlook for its services business was one of the highlights of the company's annual meeting with financial analysts, which took place Wednesday afternoon. He was joined by other IBM managers, including president and heir apparent Sam Palmisano.
Like other recent IBM analyst meetings, the tone was more apologetic than optimistic, with high-level executives focused on missed opportunities rather than victories. Still, Gerstner predicted sales growth of 16 percent for the fourth quarter and earnings-per-share growth of 19 percent.
Gerstner admitted things could have been better in the third quarter.
"Do I wish we had three points more revenue growth in third quarter?" he asked. "You bet. I wanted more than that."
But Gerster, and later Palmisano, emphasized the return on share value as IBM squeezed more income on less sales.
"Our main objective is not revenue," Gerstner said. "Our objective is old-fashioned. It's cash and earnings." During the last seven years, IBM delivered 14 percent compounded growth in pretax income, 23 percent growth in earnings per share, and $105 billion in cash flow, he added.
"We kind of believe earnings and cash flow drive value," Gerstner emphasized.
Focus on the Net
To get back on track, IBM plans to focus on providing hardware, software and services for business-to-business e-commerce. The dot-com boom is gone, but that's not a big deal, Gerstner said.
During the third quarter, IBM saw services revenue rise 4 percent year over year to $8.2 billion, in part on the strength of outsourcing contracts in Asia.
"We're down to the real business of e-business," Gerstner said. "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 and simply about a very powerful technology that is a tool.
"It is about who uses the technology to beat up the other guy," he added. "The wars haven't changed. It's just that somebody has invented gunpowder. And whoever uses it first is gonna win the next battle."
Gerstner described the skills shortage "as another supply problem" but one the company is working to correct. By the end of the year, IBM will have hired 9,000 outside people into its e-business services organization and retrained 10,000 existing staff. IBM employs approximately 142,000 technicians.
Although IBM is still the largest computing consulting group in the world, competition is coming on fast, with Hewlett-Packard in negotiations to buy the IT division of PricewaterhouseCoopers.
Shortages and sales declines
While IBM got caught short of skilled consultants, it wasn't the only aggravating shortage. One of IBM's most troubled operations throughout the year was its business selling components to original equipment manufacturers. Hard drive revenue declined $100 million during the third quarter.
At the same time, IBM's microelectronics operation grew rapidly but got caught flat-footed by demand in 2000, Gerstner said.
"As we went into this year, we won contract after contract after contract with almost every single one of the major network infrastructure manufacturers," he said. Demand was two to three times what IBM had forecast.
"We collapsed. We just didn't have inside IBM the manufacturing processes to deal with that kind of ramp-up," Gerstner said.
Shortages of ceramics used in chips hurt sales of IBM RS/6000 and AS/400 servers. AS/400 revenue, for example, declined 6 percent during the third quarter.
Gerstner focused on server strengths, touting IBM's expansion into Unix servers during 2000, calling it a milestone for the company's server business. But he also acknowledged, "We have a lot to do to catch the front-runners."
IBM completed its four-year project to move to a single line of servers, the eServer brand, during the quarter. While Gerstner emphasized eServer's importance to ending customer confusion, IBM took a short-term hit during the third quarter, sapping S/390 revenue 24 percent as customers held back orders for new models.
Gerstner said "2000 will be the year we look back at a very important decision at IBM to embrace Linux." This decision is crucial to IBM's success in the server market because "there are only two major growth platforms going forward: NT and Linux."
He emphasized, "The server growth in Linux is absolutely startling, and now people are starting to predict it will cross over and be even more than NT."
IBM's PC division earned $65 million during the third quarter, but Gerstner said, "We're not anywhere near where we've got to get."
Gerstner failed to give a whopping endorsement of the PC division, though, which during the third quarter turned its first profit in about two years.
"We're feeling OK about the direction of our activities in PC," he said.
IBM's software business disappointed during the third quarter, with revenue down 3 percent from a year earlier to $2.9 billion.