Y2K Lockdown Pounds AS/400 Sales

The Y2K slowdown--along with a slowdown in IBM marketing efforts--sent AS/400 sales into their fourth consecutive quarterly slide. IBM announced that AS/400 revenues fell sharply during the third quarter of 1999, a slide that will most likely continue through the fourth quarter of 1999 and possibly beyond.

During its third quarter earnings teleconference in October, IBM announced that profits totaled $1.8 billion, up from $1.5 billion in the same period last year.

Despite strong demand for its software and support services, IBM painted a rather bleak picture of hardware sales overall, cautioning that Y2K slowdowns could lead to lower than expected earnings in the future. Hardware sales were $8.8 billion in the third quarter, a decrease of one percent compared to last year. In comparison, second quarter sales of hardware in 1999 totaled $9.4 billion.

Sales of Netfinity servers and PC's were particularly strong, but were canceled out by poor sales of AS/400s and S/390s, according to IBM CFO Douglas Maine. AS/400 sales dropped 30% during the quarter, he reports.

The drastic decrease in AS/400 sales caught some by surprise. "The depth of the decline is somewhat surprising," says Steve Josselyn, research director for commercial systems and servers at IDC (Framingham, Mass.).IBM offered a few reasons for the decline in AS/400 sales, including Y2K. "It was a decidedly mixed quarter," says Louis Gerstner, IBM chairman and CEO. "On the negative side, we saw a Y2K slowdown toward the end of the quarter, particularly in our large servers, and to a lesser extent in services and operating systems software. Looking forward, we believe we will continue to feel the effects of the Y2K slowdown in the fourth quarter, and into early next year."

Maine attributed some of the decline in AS/400 sales to execution of its channel programs. "There were areas where our performance (in the AS/400 channel execution program) did not measure up," he says.

One particular area suffering from IBM's AS/400 distribution strategy is Europe, according to Josselyn. "IBM has changed channel strategy in Europe from agents to tier distribution and it hasn't worked really well," he says. "Because Europe makes up 40 percent to 45 percent of the AS/400 sales, I think that region being down has had a dramatic effect on the overall AS/400 sales."

Last quarter, AS/400 sales in Europe were down a reported 25%. While IBM did not specifically comment on third quarter AS/400 revenues in Europe, the company blamed "very poor sales execution in Europe, where the AS/400 has traditionally been well received."

Analysts also point to weak marketing efforts on behalf of the AS/400 as a major reason why its sales have continued to decline. "They've done a good job in updating technology on the AS/400, but it's a marketing problem," says Wayne Kernochan, VP of platforms and services with Aberdeen Group (Boston). "IBM has been trying to expand the AS/400 and make it known for other applications, like Java, but it hasn't been working. IBM has not succeeded in making the AS/400 visible enough."

Instead, IBM has focused on Netfinity and RS/6000 the last six to nine months, to the detriment of the AS/400 and S/390, says Josselyn. "IBM needs to incorporate a more comprehensive strategy that includes all of their product lines."

Both analysts expect IBM to put increased emphasis on marketing the AS/400 in the near future. "After four quarters on decline, I expect to see more focus placed on the AS/400," says Josselyn. "According to our research, after Y2K the bulk of spending will be in e-business applications, so that's what I expect the AS/400 to focus on," says Kernochan.

Third quarter revenues from the Americas totaled $9.6 billion, a decrease of one percent compared to the third quarter of 1998. Revenues from Europe/Middle East/Africa were $5.8 billion, down two percent, while Asia/Pacific revenues increased 28 percent to $3.7 billion. OEM revenues also soared, with a total of $2 billion, an increase of 24 percent.

Revenues from IBM Global Services increased 19 percent to $7.9 billion. Software revenues increased seven percent to $3.0 billion. Middleware revenues increased 13 percent while revenues from Global Financing increased 14 percent to $774 million. Overall, net income from the first three-quarters of 1999 totaled $5.6 billion, compared to $4.0 billion in the same period of 1998.

Maine Out as IBM CFO: To Head New Internet/Call Center Sales GroupAfter only 18 months in the job, IBM CFO Douglas Maine has been moved from that position and tasked with heading up a newly created sales unit called TeleWeb that will forge a news sales approach by handling IBM customers via the Internet and through telephone customer service call centers.

In his new position, Maine will combine and oversee IBM's customer service call center and corporate Web management operations in an effort to increase the use of the Internet in providing customer support and increasing sales. Maine came to IBM from MCI with extensive call center experience. He will report to Bill Etherington, general manager of IBM's sales and distribution activities.

Replacing Maine as CFO will be long time IBM finance executive John Joyce, currently the general manager of IBM's Asia-Pacific region and a former IBM controller.