Tech Industry

Big Blue's profit falls short of expectations

IBM's Global Services and sales execution contribute to disappointing first-quarter earnings.

IBM's first-quarter revenue and profit rose 3 percent but fell short of its financial targets, the company reported on Thursday.

In a surprise statement, Big Blue CEO Samuel Palmisano said the company had not been able to close a number of transactions in its Global Services consulting unit before the end of the quarter. He said the shortfall occurred in countries with "soft economic conditions."

"We are taking appropriate measures to sharpen our execution, as we continue to implement our global growth strategies," Palmisano said.

IBM had planned to report fiscal first-quarter 2005 earnings on Monday, April 18.

The computing giant saw a profit from continuing operations of $1.41 billion, or 85 cents per share, compared with $1.36 billion, or 79 cents per share, a year earlier. Excluding the effect of the weaker U.S. dollar, revenue rose just 1 percent year over year, the company said.

Analysts were looking for a profit, including options expense, of 90 cents per share.

Weakness abroad
IBM pointed to the weak economies in France, Germany, Italy and Japan, which in total represent a quarter of its revenue, as contributing to the disappointing quarter.

Chief Financial Officer Michael Loughridge said on Thursday that it was not clear that IBM's first-quarter performance indicated a general downturn in technology spending.

"We had a rough couple of weeks across the board at the end of the quarter. Right now, it's too early to see if it's part of a broader trend," he said.

"We know we have execution issues," he added.

He said that IBM will begin a reorganization in the second quarter to address the problems it had last quarter.

"A couple of these actions may require some sizable restructuring activities, primarily designed to move decision-making closer to the customer and improve the speed of execution at the customer level," Loughridge said.

Those changes were already being put in place and will be accelerated to try to improve the company's profitability in the second half of the year, he said.

Sales from Global Services, which represents about half of the company's revenue, were up 7 percent, or 3 percent adjusted for currency, to $11.7 billion.

Hardware revenue was flat in the quarter, or down 2 percent adjusted for currency, to $3.9 billion. The total was hurt by a slide in mainframe-related revenue of 16 percent, compared with the same period last year, and the delayed introduction of a storage product.

In the second quarter, IBM expects to complete the sale to Lenovo of its PC division, which saw a 3 percent decline.

IBM's software business saw a 2 percent increase in revenue to $3.6 billion. Its WebSphere and Tivoli lines grew at double-digit percentage rates, while its Rational tool business was flat, and mainframe software sales slipped.

Loughridge noted that IBM's "pipeline" of Global Services deals is up 30 to 40 percent, going into the second quarter.

He said the software group should have a strong second quarter and said he was "pretty confident" IBM could address sales problems in its hardware business.

IBM expects that it will be able to meet financial expectations for the full year, but Loughridge did not make any forecasts for the second quarter.

Shares of IBM closed at $83.64, a drop of 93 cents, or 1.1 percent. They fell to $80.31, or just over 5 percent, in after-hours trading.

Reuters contributed to this report.