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Rare IBM warning rattles sector

update The profit warning, a rarity for Big Blue, is tied to "a continued slowdown in customer buying decisions." It also marks a rough start for new Chief Executive Sam Palmisano.

update IBM's first-quarter results will fall far short of analysts' expectations, the company said Monday, pointing to "a continued slowdown in customer buying decisions."

The company said it expects to post a profit of between 66 cents per share and 70 cents per share, or between $1.65 billion and $1.75 billion, with revenue coming in at between $18.4 billion and $18.6 billion. Analysts were expecting Big Blue to post a first-quarter profit of 85 cents per share on revenue of $19.65 billion, according to First Call.

In the year-ago quarter, IBM reported a profit of 98 cents per share on sales of $21 billion.

IBM's profit warning is notable for a few reasons. For starters, profit warnings from Big Blue are rare. The company last issued a profit warning in 1991, according to a company representative.

IBM's warning also has an effect on the entire technology sector. In 2001, Wall Street had largely viewed IBM as a safe haven in technology because the company posted strong financial results even as rivals stumbled. With IBM's warning, investors were skittish about much of the tech sector and dragged down the Dow Jones industrial average and the Nasdaq on Monday morning. The CNET Technology indices were also down across the board. The Nasdaq recovered slightly in the afternoon, though, as gains by some software companies helped counterbalance the IBM announcement. IBM's stock closed Monday at $87.41, down $9.84, or about 10 percent.

The warning also marks a rough start for Chief Executive Sam Palmisano, who took over the top spot last month, replacing Lou Gerstner, who had been CEO since 1993.

Merrill Lynch analyst Steven Milunovich said in a research note that Palmisano may have decided to reset estimates as a buffer for future quarters. "It is not clear to us as to whether the business is getting that much worse or this announcement reflects the inclinations of the new CEO," said Milunovich.

Milunovich noted that IBM is likely to cut its earnings targets for future quarters. According to First Call, IBM is expected to report 2002 earnings of $4.76 a share.

IBM said in January that it was "comfortable" with analysts' expectations, but cautioned then that business conditions would be difficult.

Chief Financial Officer John Joyce said IBM "saw across-the-board weakness in revenues in the first quarter, particularly in our OEM (original equipment manufacturer) technology business."

Revenue from IBM's Technology Group, which includes its semiconductor and OEM businesses, will be down 35 percent and will lose around $200 million, or 8 cents per share, for the quarter.

IBM formally reports results for the quarter on April 17.

IBM's stock has suffered as investors questioned some of the company's accounting practices. It was recently reported that the Securities and Exchange Commission had requested that the company amend its 1999 annual report and its first-quarter 2000 report. The matter was resolved without having to amend the reports.

Some analysts said that calls for more accounting disclosure may have played a role in IBM's profit warning. In recent quarters IBM has used nonoperational financial items such as tax rates and pension fund gains to produce strong results, but Wall Street has frowned on the use of those financial levers.

That fact eliminates IBM's ability to use such financial items to offset weak sales, said analysts. "We believe today's preannouncement reflects reduced flexibility, in part, stemming from increased disclosure requirements," said Prudential Securities Analyst Kimberly Alexy.

Alexy said increased disclosure means IBM would face a backlash for using nonoperational items to offset a weak quarter. She noted that IBM's fourth quarter was aided by a $300 million gain related to the sale of its optical transceiver business to JDS Uniphase, but the company was pressured to disclose more about the deal in its filings with the SEC.

"We highlighted at the time that increased disclosure would limit IBM's flexibility to offset future revenue misses," said Alexy. "We believe that this fact is not an insignificant element of what happened this quarter (for example, IBM is less able to offset revenue misses than in the past)."

News.com's Larry Dignan contributed to this report.