CNBC Interview mit Merrill Chefstrategen über IBM

O - Ton des gestrigen Interviews :

Martha MacCallum/CNBC: Shares of IBM down $4.21. Several firms cut earnings forecasts, in fact, on Big Blue today after Electronic Data Systems slashed their profit outlook late yesterday. Joining us is one of the analysts who issued a call on IBM this morning. He is Steve Milunovich, Chief Technology Strategist at Merrill Lynch, in New York. Hi Steve.

Steve Milunovich: Hi Martha, how are you?

Martha MacCallum/CNBC: I'm good thanks. So let's get disclosure out of the way, as we start this. Do you own IBM, or is there any investment banking relationship with EDS or IBM and Merrill Lynch?

Steve Milunovich: Yes, I do own IBM shares, and Merrill does have a banking relationship with both IBM and EDS.

Martha MacCallum/CNBC: All right, that said, let's take a look at IBM because, really, most of the traders I spoke to this morning said the focus here really is on IBM, because everybody wants to know if they are going to warn as EDS did. What do you think?

Steve Milunovich: I don't expect IBM will warn or preannounce earnings. Nevertheless, as you said, on a scale of one to ten how affected is IBM on EDS problems? I'd say it's a three or a four. Certainly, directionally there is going to be a high correlation. IBM services business is 40% of revenues, 50% of the profits. On the other hand, the magnitude, I think, will be quite different. I do not sense IBM is having the degree of difficulty that EDS is.

Martha MacCallum/CNBC: One of your competitors said that EDS had been overly optimistic and that IBM has been more realistic. Do you think that's true?

Steve Milunovich: I think there is truth to that. IBM has, for some time, had some problems with its systems integration business. So continued weakness there wouldn't be a surprise. Last quarter IBM had weak outsourcing signings, as well. So we've been expecting some trouble here. I think we're all suggesting maybe it's a little worse than we thought. So we took our quarterly estimate from a dollar down to 97 cents, for example. But I do think IBM has been a little bit more realistic than, perhaps, EDS.

Martha MacCallum/CNBC: The big question, of course, is IT spending. Everybody's been waiting for the next quarter and the quarter after that for when we would see some genuine return of IT spending. What is your outlook at this point?

Steve Milunovich: Well, the outlook continues to be relatively bleak. We do expect that the fourth quarter will see some seasonal improvement. A company like IBM, in particular, is weighted toward the fourth quarter in terms of sales. So I think we'll see a 5% to 10% sequential improvement, versus the industry typically is 10% to 15%. But then I think next year it's going to be tough again. So at least through the first half of next year, IT spending is likely to be weak. We're sticking by our view, which we've suggested for almost two years now, that 2004, 2005 is when spending really comes back.

Martha MacCallum/CNBC: You know, IT spending has gotten a little bit of a pop, looking at EDS's fine print, from some naval contracts. Some have said technology may get a bit of a boost from a war or from increased defense spending. Do you think that that's meaningful for these companies?

Steve Milunovich: It's somewhat helpful, but I wouldn't say it's enough to offset the weakness in key verticals like communications and finance. Government spending generally does well in the September quarter. Of course, fiscal year-end is generally strong because of these security issues today. A company like IBM, though, probably gets 5% to 10% of its business from the government. In fact, it sold its federal systems business a few years back. So except for some companies like CSC, it's generally not the primary mover of earnings.

Martha MacCallum/CNBC: Steve, slightly off topic, but still on IBM, there's been so much talk about CEO compensation lately, and the packages that retired executives receive. Do you have any knowledge of Mr. Gerstners's retirement package, or whether they have considered amending it in any way, given all the press that retired executives have been receiving lately?

Steve Milunovich: Well, as I recall, they have disclosed what his retirement package is. It includes being compensated for consulting, having an office, and so forth. I'm not aware that they have considered changing any of that. You know, when you look back at IBM, when he came in '93 and '94, the company was almost going out of business. And you look at the billions of market cap that have been added since then, and you can argue that he should be well-compensated. You know, obviously, in this environment people are going to take a look at it though.

Martha MacCallum/CNBC: All right, well maybe we'll be able to get into that a little more later. Thanks very much, Steve, appreciate it.

Steve Milunovich: Thank you, Martha.

Martha MacCallum/CNBC: Steve Milunovich, Chief Technology Strategist at Merrill Lynch in New York.