Lou Gerstner Gerstner Shows the Success

On April 27, IBM Chairman and CEO Lou Gerstner addresses stockholders in attendance at the 1999 IBM annual meeting in Miami, Florida.

 "I thought I'd start with an announcement that might be of some interest to you. This morning your board of directors approved a 9 percent increase in the quarterly dividend -- from 22 cents to 24 cents per common share -- or 12 cents per shareassuming our proposed stock split is approved. The dividend is payable on June 10 to shareholders of record on May 10. For those of you keeping score, this increase is the fourth in four years and means your dividend payments have risen by 92 percent since 1996.

We're delighted to be holding this meeting in south Florida. As you just heard, we have a significant employee base in the state, and our Latin American sales headquarters recently relocated to Coral Gables.

The Broward County school system is a major partner in IBM's $35 million Reinventing Education program. The district used a $2 million grant to build a "data warehouse" that converts huge volumes of raw data into meaningful information and equips administrators and teachers to extract insights that can improve student performance. For example, the system makes sure the right kids get special help in reading, and monitors the efficacy of dropout prevention programs. You can see a demonstration of the system in our technology exhibit just outside. Broward's program is among 21 in the country, where IBM technology and IBM people are working to reform our public schools.

Before I update you on the state of your company, I want to thank you for the confidence you've shown in IBM's leadership team, and the more than 290,000 people of IBM. Many of you have been with us through some very hard times. You stayed the course. That makes it even more rewarding for me to tell you that today, the IBM Company is strong.

When we started this journey in the spring of 1993 our future was uncertain. Six years later, we're a company that can look forward to the future and say with confidence that our aspiration, our goal and our plan, is move to the head of the pack -- in market leadership, thought leadership and technological leadership.

You're familiar with the highlights of last year's performance.

Record revenues, record earnings per share, and an important, marked increase in customer satisfaction. Our progress was reflected in our market value, which increased $69 billion in 1998. Our stock price rose 76 percent last year, and as I just noted, in a few minutes you will vote on our second stock split in two years. By the way, our current stock price is up 81 percent since last year's shareholder meeting. We continued to make strategic use of our cash:

$5.6 billion in research and development investments, $700 million in acquisitions last year, and $6.5 billion in capital expenditures. We made these investments and still had substantial cash to return to our shareholders -- directly through dividends -- and by investing nearly $7 billion to repurchase IBM shares. And in another vote earlier this morning, your Board authorized the repurchase of an additional $3.5 billion of IBM common shares.

After making all these investments last year, we ended 1998 with more than $5.8 billion in cash. So it was another good year. And the momentum we generated in 1998 is carrying over into 1999. As you know, last week we announced a very strong first quarter.

We are especially encouraged by the results in three businesses that have emerged as important new growth engines -- software, services and OEM technology. I'll comment briefly on each.

Services is the fastest-growing part of the information technology industry, and our services business is growing 20 percent a year -- and 50 percent faster than the overall industry. One of the things we like best about this opportunity is that it's big -- twice as big as hardware, and there is no dominant competitor. At least not yet. We're working on that. Although we are the market leader, our share is less than 10 percent. So the potential is enormous. Contracts in this business frequently span multiple years. We started 1999 with $51 billion worth of services contracts already on the books. And we added $10 billion more in new contracts in the first quarter.

Next, software. Four years ago, we didn't even have an identifiable software unit. We built and sold a lot of great software, but we didn't manage it as a single, coherent business. Last year this huge business began to flex its muscles. Both software revenue and profit posted good growth. We recently reclaimed the number-one spot in the database market. Both our major software acquisitions are strong performers.

From Lotus: 14 million new Notes installations last year. Overall, Notes has grown from a customer base of around 2 million when we first acquired Lotus to about 35 million today. From Tivoli: our systems management products outgrew our biggest competitor by a 2 to 1 margin last year. The third emerging growth engine is what's known as Original Equipment Manufacturer sales, or OEM. This is the business of selling high-tech components to other high-tech companies. This business didn't exist inside IBM at the start of this decade. It's grown at double-digit rates for the last two years and in 1998 generated nearly $7 billion in revenue. This new and growing business is a direct result of the extraordinary strength and achievements of IBM's technical community. Some of our latest innovations are on display just outside this room. I hope you'll take a moment to check them out.

Let me note here that last year IBM was again awarded more U.S. patents than any company in the world -- our sixth straight year of patent leadership.

The fact that IBM has great technology may not startle people. What does surprise some people is how we're leveraging these investments and achievements through OEM sales. Much of this revenue comes to us from some of our strongest competitors. You may have read about our recent multi-billion-dollar deals with Dell for PC components and with EMC for storage technologies. Needless to say, these aren't sympathy votes. These are steely-eyed competitors who have decided to buy critical technologies from one of their toughest competitors. I don't think they'd do that unless they were absolutely convinced that IBM has the best technology available.

So we're encouraged by these new high-growth businesses -- services, software and OEM technology. But let me clarify something that occasionally confuses some people. IBM is not transforming into adifferent company. We aren't swinging from one vine to another.Wearen't morphing from a hardware company into a services company. Infact, we're still the world's largest computer hardware company. We arethe world leader in server market share, twice as big as our nextbiggest competitor. Hardware remains critical to our business model, andour strategic direction.Six years ago we made a fundamental decision tokeep IBM together. We said our single strongest competitive advantagewas our ability to deliver integrated solutions for our customers --solutions that consist of hardware, software, services, knowledge andinsight. Today, we see that this strategy has paid off where it counts-- in the view our customers hold of IBM, and in what they're lookingfor from our industry. We're also seeing many of our competitorsscramble to match our strategy of integration -- with not a lot ofsuccess to date. Our customers expect this industry to deliver greattechnology, of course. But at the end of the day, they want us to givethem competitive advantage -- speed, efficiency, market reach, customerknowledge. That's where integration comes in. What sets IBM apart is ourability to deliver technologies that are integrated with one another,and technologies that are integrated with our customers' businesses. Ofall the things we have reason to feel good about, perhaps mostencouraging is the fact that a new world we first described four yearsago is becoming a reality. Just a few years ago, there was a lot ofspeculation about what the Net was all about. People painted it as areplacement for the telephone or the local library, a planetary chatroom or the home of cool online magazines and games. Enter IBM. As earlyas 1995 we said the Net would be about business and commerce, and thatit would be a vocational medium, where real work -- work that matters --gets done. Now, at that time we expected some people to yawn. We werewrong. They laughed. Today, our competitors aren't laughing. Many ofthem are too busy trying to emulate our message and strategy. Lookwhat's happened in just the blink of an eye. Nearly 150 million people are online today and that's headed toward hundreds of millions -- maybe a billion -- before long. In the U.S. alone, more than 50,000 new people come online every day. And this isn't just the domain of Americans, or Generation X or Y. True, about 13 percent of U.S. residents between 18 and 24 are online. But that's about the same number of people 55 and older who are regular users of the Net. And sometime this year there will be more non-Americans than Americans using the Net. What are all these people doing? The latest estimates say Internet commerce totaled around $50 billion last year. And within the next few years this digital economy is expected to crack the trillion dollar mark -- accounting for nearly 10 percent of all business sales. Given these numbers, it's only natural that a lot of people think of the Net only in terms of "e-commerce." But the power of this transformation transcends online buying and selling. So two years ago, we developed a more descriptive vocabulary. We coined the term "e-business" to describe all the ways individuals and institutions derive value from the Net -- buying and selling, but also the important transactions between teachers and students, doctors and patients, governments and citizens. It's gratifying and exciting to see all of this coming to pass so quickly. Over the last two years IBM has invested hundreds of millions of dollars to take our e-business message to the marketplace. We've now completed thousands of e-business engagements. We've learned that the biggest issues customers face aren't about technology. The big decisions are on issues of business strategy and competitive advantage. So the first thing customers need is help setting strategy. From there, they need help to execute it quickly and cost effectively. This drives huge demand for services -- consulting, systems integration, network services and services to ensure security and protect intellectual property. We're seeing that e-business also drives demand for the kind of computing we know very well -- enterprise computing. That's because e-business not only changes what customers do and how they do it, it changes where computing takes place, as well. When we go online to book a flight, pay a bill, trade a stock or attend a class, the heavy work of computing doesn't take place in our PCs. The workload is handled by big servers and databases and transaction processing systems laboring away behind the scenes somewhere. Our customers are rediscovering enterprise computing and its inherent attributes of security, availability, and reliability -- because if their Web sites go down, so does their brand, their customer relationships and their reputation. That's one reason 1998 shipments of mainframe computing capacity were up more than 60 percent. In fact, our customers bought more mainframe computing capacity in the last eight quarters, than they bought in the preceding seven years. We had a pretty good crystal ball when we first saw this world of e-business. Today, when we look into that crystal ball again, we see some very exciting extensions of the e-business world. We see that computing is going to touch every aspect of our lives. Computing will be everywhere -- pervasive -- because the basic elements of technology -- chips and storage devices and networking -- are getting ever smaller, more powerful and less expensive. The first manifestation of "pervasive computing" will be a proliferation of computing "appliances" providing access to the Net. Cell phones, screen phones, Web-TVs, computers you carry in your pocket, computers you wear -- all connected to the Net. One research firm says 8 percent of Internet users are getting online today without using a personal computer. Shipments of these non-PC devices are forecast to outpace sales of personal computers within five years. But we will also see that pervasive computing will extend into all the things around us -- the infrastructure of the world -- in everything from cars to houses to machine tools. The applications stretch the imagination. Refrigerators or even garbage cans that read bar codes, and then place wireless orders to stores and ensure your shelves are restocked. Vending machines that tell the home office what's selling, at what prices. All these things are happening already. I recently read that, in Paris, botanists are putting computer chips in the city's 90,000 trees, so they can continuously monitor their health. Where will IBM play in this new world? We'll build some of the new end-user devices, but don't look for us to be a big maker of these handy gadgets. Instead, our main play will be in the things we do best: In creating the critical technologies that will drive these devices -- embedded chips, storage and software and advising our customers how to deploy all these new applications. The other place you'll see IBM is at the other end of the network, where the sea of information enerated by millions or billions of pervasive computing devices has to be captured, stored and processed. The most exciting applications will be those that analyze all this data and turn it into knowledge and insight and in the area we call "Deep Computing," where massive processing capability combined with very sophisticated software allow us to attack problems that were heretofore beyond the reach of science. We've prepared a short video to give you a look at some of the ways these technologies will influence our lives in the years ahead. (ROLL VIDEO)That may be the first video IBM has ever produced without a single blue suit, or a single white shirt. Wait, I take that back. My head of Research had on a white tee shirt. Lots of pretty cool technology in that video. But I might want to take a vote on how many of you think you needvoice-activated e-mail in your cars. I can't close this discussionwithout commenting on the information technology issue of 1999 -- theYear 2000. Basically, people want to know: What's going to happen atmidnight on December 31? And what are we doing to help our customers get ready? First, nobody knows exactly what will happen when the ball drops on New Year's Eve. But we don't see anything that supports predictions of a global recession, a collapse of critical infrastructures, or scenarios of some kind of "digital winter." We have to be thoughtful about this. The impact will clearly vary by customer, by business size, by country and by industry. Everything we see suggests that most large enterprises in major markets should be okay. There have been successful tests at major stock exchanges, national power grids, banks, and air traffic control systems, among others. What's not as clear is how smaller businesses and developing nations are going to fare. For customers, we're doing everything we can to assist them: All our current products are ready. We've mobilized thousands of business partners. We have 4,000 people dedicated to Y2K issues, working with customers inside our IBM Global Services unit, and most of our large-account sales teams are working through specific customer plans. We're providing software tools and free technical advice on our Web site, and making it easy for customers to check the status of almost 200,000 products -- past and present. Last month, we issued our one-millionth product status report over the Net. Finally, we're going to be ready ourselves. We completed more than 90 percent of our readiness work last year, and we're on track to finish the job by June, with very few exceptions. By the end of June, we'll also have tested our contingency plans.A few minutes ago, I thanked you -- IBM's investors -- for the confidence you've placed in us. I'd like to close with one more vote of thanks -- to my colleagues -- more than 290,000 people who are behind the resurgence of this great company. What they have done is extraordinary. I've never seen anything like it 30 years in business. And now we're seeing that all the hard work and long hours are paying off. We've created a big opportunity for ourselves. We have a chance to lead our industry and our customers into a new era of computing. This historic opportunity is energizing for all of us at IBM. And we're finding that it's also a very powerful magnet, swelling our ranks by 21,000 people last year, and close to 70,000 new IBMers since 1995. Together, we're a team that feels simultaneously fortunate, and unfulfilled. Fortunate -- to be at this company, at this time of historic change. Unfulfilled -- because we recognize that all we've done so far just gets us in position, just gives us the platform from which to launch our bid for leadership. We've prepared for just this chance. We're ready. We're on our way. Thank you very much. "

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