Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!americast.com!usa-post Newsgroups: usa-today.bonus,americast.usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Fri, Oct 16 1992 Date: Fri, 16 Oct 92 08:02:01 EDT Message-ID: 10-16 0000 BONUS: IBM shrinking away to nothing USA TODAY Update Oct. 16-18, 1992 Source: USA TODAY:Gannett National Information Network In the classic 1957 science-fiction flick "The Incredible Shrinking Man," some poor guy shrinks to almost nothingness after sailing his boat aimlessly through a mysterious fog. IBM must be feeling that way these days. The USA's largest computer maker just keeps getting smaller and smaller. After issuing dismal third-quarter results Thursday, IBM's stock shrank to a 10-year low - down 5 1:8 at $72 7:8 a share. It has cut 25% of its payroll since 1985, including 40,000 people this year alone. And IBM has slashed its manufacturing capacity a whopping 40% since 1989, scaling back operations at 30 factories worldwide. WHEN WILL IBM BEGIN TO GROW AGAIN? Not soon, say longtime industry observers. "It's a car crash in slow motion that's going to last for two to three more years," says George Colony, an IBM analyst at Forrester Research. "There's no good news coming from this company." That's a bitter pill to swallow for a corporate giant that once predicted it would have $100 billion in annual revenue by the early 1990s. In the third quarter, IBM's revenue rose just 2% from the same quarter last year to $14.7 billion. So it's unlikely that revenue will top $64 billion - last year's revenue total - for all of 1992. WHAT HAPPENED TO EARNINGS? Earnings were even worse. The company's third-quarter operating profit was just $86 million, or 15 cents a share - a 50% drop from last year and about half the lowest estimate by Wall Street analysts. IBM reported a net loss of $2.8 billion, or $4.87 a share, for the quarter because of a one-time $4.4 billion charge to pay for job reductions and manufacturing cutbacks. WHAT HAPPENED TO BIG BLUE? Many of IBM's current problems stem from the economic slowdown in Europe, where the computer giant gets almost half its sales. Frank Metz, IBM's chief financial officer, told analysts Thursday, "Our results in Europe in September were off the charts. People just stopped buying things." Even so, IBM is seeing demand shrink across many of its product lines. That's caused by leaps in technology, changes in demand and bad management, analysts say. WHY IS THE DEMAND SHRINKING? "IBM (employment) is shrinking because there are fewer computer chips on a circuit board and fewer circuit boards in a computer. Therefore, fewer people are needed to make each computer," says computer-industry analyst Bill Milton of Brown Bros. Harriman. But technology advances alone don't explain what has happened. All makers of large computers - particularly IBM, Unisys, Digital Equipment and Wang Laboratories - have been victims of a massive shift to small boxes that do more for less money. Beyond that, each of IBM's core lines of business - mainframes, midrange computers and personal computers - has unique problems. HOW HAVE MAINFRAMES BEEN AFFECTED? In a down economy, IBM's biggest problem has been selling big-ticket items like the room-size computers that account for half of IBM's annual revenue and 60% of its profits. IBM sold more than 2,000 mainframes worldwide in 1989. Last year, it sold just 1,077, a 47% drop. Yet IBM factories were geared to churn out hundreds more of the $5 million to $20 million mainframes than it is selling. IBM has a policy to avoid layoffs. So the only alternative, as the recession dragged on, was to reduce production and slash employment with voluntary severance plans. WHAT ABOUT MIDRANGE SYSTEMS? Among IBM's best-sellers are the smaller computers that run automated teller networks and department-store cash registers. IBM will sell 58,000 of its AS:400 midrange computers this year, a 12% jump from 1991. IBM's Rochester, Minn., factory is hiring 500 people because of strong demand for the machine. "It's the brightest star on the horizon for IBM at the moment," says ADM Consulting's David Andrews. In many instances, customers who used to buy IBM mainframes are buying AS:400 models. That denies IBM a lucrative mainframe sale. It also robs IBM of the profits it makes supplying loyal mainframe owners with software and service. HOW WERE PERSONAL COMPUTERS HURT? IBM is still the largest maker of PCs, accounting for almost 30% of PCs shipped last year. But IBM has been steadily losing market share to Apple and Compaq, as well as hundreds of lower-cost competitors such as Dell and Gateway. IBM recently announced it was forming a separate personal-computer division to make it more competitive, and it will come out with a low-priced line of PCs Tuesday. Analysts question the move because PCs already have a razor-thin profit margin. IS IBM SUCCEEDING? IBM doesn't break out profits for its various divisions. But analyst Bob Djurdjevic of Phoenix-based Annex Research says IBM is probably losing $1 billion a year on PCs. Despite those problems, IBM still has fans. "The computer industry is going through a difficult time, but computers are not going to go away. And IBM is still in a strong position to invest in the future," says Andrews. WHERE IS IBM PROFITABLE? IBM still makes tons of money selling peripheral products such as disk drives - which store information in computers - and software. IBM's third-quarter software revenue jumped 11% to $2.7 billion, and service revenue, which includes such things as running computer rooms for customers, climbed 38% to $1.8 billion. IBM is gaining market share in the white-hot field of computer workstations. After entering the field in 1990, the IBM RS:6000 workstation is already selling at a clip of $2 billion annual revenue. The high-performance desktop unit is stealing customers from industry leader Sun Microsystems. WHAT DO ANALYSTS EXPECT? But for analysts and investors accustomed to IBM leading the industry as well as the stock market, the computer giant's recent financial performance makes them wonder when or if IBM will regain its footing, let alone its stature. "I've been covering IBM for many years, and I can't recall them ever earning just 15 cents a share in a quarter," says analyst Milton. HOW ARE STOCKS INVOLVED? Analysts such as Colony predict that IBM will have to break into several smaller companies some time this decade, and investor frustration will be the reason. "This will not be an internal revolution but a stockholder revolution," says Colony. "This is one of the worst-performing stocks over the last 12 years. The stuff is junk." ARE THERE OTHER POSSIBILITIES? Others suggest IBM must grow smaller before it grows bigger. "In retrospect, IBM may have been retooling for the future and the future never happened," says Sam Albert, an IBM analyst and consultant. He says the total number of people leaving IBM this year could reach 50,000. Albert says IBM must slowly transform itself into a company that sells software and services computers, not one that sells them outright. Bonus Editor: Kate Coughlin. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM