Sam Palmisano
IBM's Annual Stockholders Meeting
Louisville, KY
April 30, 2002
Good morning ladies and gentlemen.
As Lou said, we're delighted to be holding this meeting in Louisville.
Louisville and Kentucky are home to approximately 1,000 IBM employees. Just east of here, Lexington is an important part of IBM Global Services' operations to deliver strategic outsourcing services to customers across the southern United States.
Of course, we take our responsibilities to the communities that support our operations very seriously. So I'm very proud to tell you that IBM and our Kentucky-based employees together contributed over $700,000 in cash and computer equipment to local non-profit and educational organizations last year. On top of that, our people volunteered more than 5,500 hours of their time in community service.
Last year when Lou Gerstner addressed IBM shareholders ... he talked about the global economic uncertainty and the fact that no company would be immune if customers were to make deep, across-the-board cut backs in their IT spending programs.
Well, we all know what happened.
World economies continued to decelerate, the last remnants of the speculative bubble around the dot-coms were flushed out of the system ... and all of which was exacerbated by the tragedies of September 11th.
It was one of the most turbulent, difficult years in recent memory.
When it was over, the information technology industry had actually contracted .... The first time that's happened in more than a decade.
Yet, in the face of all that, IBM delivered solid results.
We outperformed our industry for the first time since the 1990s. We certainly out-performed our major competitors. And we were rewarded for that performance.
As we documented in our Annual Report:
|
After making all those investments, increasing dividend payments to our investors and further driving shareholder value by repurchasing $5.3 billion in IBM common shares, we ended the year with a cash balance of $6.4 billion.
Of course, we continue to reassert our technical leadership. I believe most of you know that for the ninth straight year, IBM led the world in new patent awards. In fact, our technical community made us the first company ever awarded more than 3,000 U.S. patents in a single year.
I'll come back to our technical leadership in a moment, and I hope you'll take time on your way out of the meeting today to visit our demonstration area, see a few of the technologies that are reshaping business and society ... and spend a few minutes talking to some of the people behind all this phenomenal innovation.
When you add it all up ... 2001 was a year that tested — and validated:
|
It was a tough, tough year. And in that kind of climate, the job at hand is to control what's within your power to control. That's what we did in 2001.
We consistently outperformed our competitors ... we did a good job managing our discretionary spending, and most important of all, we gained share in virtually every high priority business segment.
Let me say a few words about the first quarter of 2002.
You know we just announced our results, which were in line with the guidance we provided to Wall Street when it became clear to us that our results were not going to reach the street's expectations.
What happened?
Quite simply ... and as we've been saying consistently since the second half of 2000 ... no company is going to stand on the sidelines, shielded from the impact of a protracted economic downturn.
We weathered the global recession relatively well in 2001 — but it was unrealistic to believe we'd indefinitely buck the trend of quarter after quarter of what's been happening. Which is, customers in every industry reducing or delaying anything but their most critical investments in information technologies and services.
We began to see signs of this in the fourth quarter, and we clearly felt the impact in the first quarter, especially toward the end of March.
Usually customers orders build through the course of the quarter, and most of the transactions get booked in the last few weeks.
Well by mid-March when things really should have been heating up ... It was clear we were going to see a large shortfall ... directly reflecting our customers' reluctance to commit to significant capital spending in this environment.
These widespread deferrals hurt us across every one of our major business segments.
However, even within this tough climate:
|
While no one can predict the timing of a recovery, we remain optimistic that business conditions will improve later this year. And we're very confident that when the turnaround comes, we're going to be in position to capitalize.
Because there's much more at play here than just a weak economy. The information technology industry is moving through a fundamental transition — the kind that's only happened a few times in the history of the industry.
Every time it happens, a new computing model is required, and a new set of leaders is created to drive the change, set the technical agenda, and lead customers through the transition.
That means providing both the technical infrastructure, and the kind of business insight that customers need to set their own strategic and competitive directions.
We all know that good things flow to the companies that seize market leadership during major shifts.
Thirty years ago, IBM was that company. This was the era of centralized, mainframe computing. We defined it, and reaped the enormous benefits of our technical vision and ability to consult with our customers about how they would automate business processes like accounting and payroll and logistics.
This was a centralized computing model, that gave way to distributed, departmental computing ... followed by the PC.
This was the computing model this industry called client/server computing that was architected for personalized departmental productivity. It was led by companies like Microsoft and Intel ... along with a host of specialized, one product, pure play competitors — each delivering a discrete piece of an overall solution and leaving integration of the solution to our customers.
Now, the model is shifting again ... moving to what we've been talking about for several years: networked computing and e-business.
And what it's going to take to lead in this phase will be far different.
|
This is IBM's franchise ... and the opportunity that results from this industry shift is ours to lose. It's driving demand across our portfolio:
|
s and storage subsystems, where last year we gained 3 points of share.In software ... the key strategic platform is what's known as middleware. It's essentially the software that integrates all the servers ... with all the applications ... with all the users and all kinds of connected devices.
|
Now, long before any customer makes the substantial investments required to build out their e-business infrastructure, ... they have to know what they're trying to achieve, the business value they'll derive, as well as how they're going to get from here to there.
These aren't simply technical decisions. They're decisions that are increasingly being made by operating executives, chief executive officers, university presidents, or heads of government agencies.
So decisions on technical implementation increasingly are being made in favor of partners who can provide the best industry-specific insight ... business insight ... in addition to world-class technologies.
This is why ... over the last decade ... we've amassed inside IBM Global Services, the world's largest business and technology consulting organization.
And while no business is insulated from the vagaries of economic twists and turns, we know that even under challenging economic circumstances — especially in those conditions — customers continue to invest in services to manage technical complexities and financial risks.
I just mentioned that we had our best first quarter ever in terms of new contract signings.
In 2001, we dramatically improved services profit performance: services contributed nearly half of all IBM pre-tax profit for the year:
|
And importantly, we started this year with a backlog of future services work of more than $100 billion.
Finally, technical leadership. Every time there is a fundamental shift in the computing model, there is a huge premium on the ability to innovate, fill the technical white spaces, deliver both the products and component technologies customers will need.
That's going to be more true than ever before as we think about the complexities and management challenges of e-business.
I've already covered our continued patent leadership and the product performance which, of course, is predicated on technical leadership.
But we're also in the process of establishing IBM leadership in critical emerging areas .... last year we launched our Project eLiza leadership initiative to develop self-managing systems and computers that monitor their own performance, fix themselves and manage upgrades — all without human intervention.
We're also out in front in one of the grandest challenges in computer science — turning the Internet itself into a gigantic virtual computer, with computing resources spread out over the Internet and linked together over high bandwidth. This is Grid computing.
And on the horizon, we have the promise of magnificent technical breakthroughs from quantum computers to our Blue Gene super computer for Life Sciences.
Despite the short-term environment in which we are operating in, let me tell you that it's never been more apparent that our business model is strong. And our strategies are correct.
I know this to be true because our customers validate them every day.
They understand that the real benefits and ultimate payoff from the networked world involves the transformation and integration of the entire enterprise.
This is the IBM difference.
Not only do we have the experience and the ability to develop and deliver the world-class products, but we have the leading services organization in the world to integrate them and make all the pieces work together.
In sum, our value proposition is more relevant today than it has been in my recent memory. And as many of you have probably noticed, it is being emulated by our competitors through mergers, acquisitions or alliances.
The second reason is e-business.
We saw it first. And we made some tough calls and realigned our portfolio around it. We stayed focused on the areas of our business that were of greatest strategic and technical importance and would deliver the highest value to our customers and our shareholders.
There is a final reason as to why we remain confident about our future. It's our people.
As many of you know, I have grown up in this company. I can honestly admit that we have never had such an impressive workforce — 320,000 people relentlessly focused on making it all happen.
Everyone of them worked tirelessly throughout 2001 to deliver solid results in the face of very difficult economic conditions. They never backed down. They never gave up.
We also saw the compassion of our people shine through in the wake of the terrible tragedies in New York, Washington and Pennsylvania that occurred on September 11.
IBM was profoundly affected by the terror attacks — our organization, our employees, our customers.
Two IBMers lost their lives in the attack ... And dozens of others lost family members in the attacks.
We also had more than 1,200 customers within a three-block radius of the World Trade Center, and they began calling us for help soon after the attacks.
Ten days later, we had shipped out 12,000 laptops, 5,000 workstations and hundreds of servers.
What makes IBM great is the people who work for IBM. And what I will always remember is the way our colleagues responded — spontaneously, instinctively, immediately — they wanted to help, however they could.
Lou and I received a tidal wave of emails — literally thousands -- from IBMers offering assistance. Some people gave money. Some gave blood. Some offered to drive thousands of miles to reach Manhattan or Washington.
I'm deeply proud of your company's response to the September 11th attacks.
We've prepared a video that I'd like to show you. It captures the essence of what makes IBM great.
VIDEO
Thank you.
As you just saw in that video clip, my IBM colleagues are extraordinary people.
And it's because of their many accomplishments and their unwavering dedication --- your company and its people are strong.
I also want to tell you how extremely privileged I am to have the opportunity to lead this company at one of the most exciting moments in our industry's history.
I've been with IBM for 29 years, through ups and downs.
And I could not be more excited about working for the best company in the world with the smartest, most dedicated people — in our industry, to take IBM to even greater heights.
Thank you.
