Big Blue Regains Lost Luster

When IBM announced its profits soared 65 percent for its second quarter, the company confirmed what most analysts already knew: “Big Blue” has regained its luster — and then some.

The world’s No.1 computer maker’s net income for this quarter rose to $2.39 billion (US$) on revenue of $21.9 billion — compared to $1.45 billion on revenue of $18.8 billion during the same period last year. This is the second consecutive strong quarter for a company that was considered down and out just a few years ago.

Mainframes Yes, PCs No

IBM’s computer hardware business skyrocketed this quarter with revenue increasing 22 percent to $9.38 billion on its mainframe products — including its new System/390. This item sold particularly well to IBM’s e-commerce customers.

Like so many other companies, IBM took a big hit on personal computers, losing $153 million in the quarter, compared to a loss of $436 million the same time last year. Nonetheless, on the positive side, the Armonk, New York company should experience solid sales of computer servers throughout the rest of the year, according to industry analysts.

Enter a White Knight

IBM’s stellar results this quarter certainly were no surprise to most analysts, despite the fact that when IBM’s chief executive Louis V. Gerstner, Jr. took over the company’s reins in 1993, Wall Street had all but pronounced Big Blue dead. At the time, many analysts were predicting the company would be broken up into “Baby Blues.”

Instead, Gerstner’s strategy for reviving the gasping giant was to close plants and cut jobs. Along with cost cutting, Gerstner refocused Big Blue on its core businesses of mainframes and marketing.

Moreover, Gerstner began targeting the Internet and e-commerce by developing software for database processing and systems management. His actions have obviously paid off. The past several years, revenue generated by IBM services has increased a hefty 15 percent to about $8 billion.

A Possible Achilles Heel

Gerstner continues to run a tight ship keeping IBM’s expenses down to about 13 percent of revenue. However, several months ago when giving a talk to a group of analysts, it’s reported that the CEO may have displayed a possible Achilles’ heel. During his talk, he took a shot at the soaring Internet companies calling them fireflies before the storm. By doing so, Gerstner displayed what some would characterize as over confidence — or even cockiness.

There’s no question that IBM has regained its status and is now seen by many as the company to beat. But even though such success is heady wine, Gerstner would do well to keep his feet firmly planted in the vineyard and guard his flank against those upstart fireflies.

What do you think? Let’s talk about it.

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