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IBM beats estimates despite tech slump

Somewhat insulated from the PC slowdown, Big Blue bests the consensus estimate by 2 cents a share.

IBM slipped past analysts' expectations for fourth-quarter earnings by 2 cents a share.

Big Blue earned $2.7 billion, or $1.48 a share, compared with $2.1 billion, or $1.12 a share, a year earlier. Analysts polled by FirstCall expected earnings per share of $1.46.

Year over year, revenue grew 6 percent, or $25.6 billion, during the fourth quarter ended December 31. Many Wall Street analysts had projected at least $25 billion in sales. A year earlier, IBM posted revenue of $24.2 billion.

In a conference call with financial analysts, IBM Chief Financial Officer John Joyce dismissed concerns about slowing PC sales and technology spending in the United States.

"The market has continued to shift in our favor," he said. The size of IBM's customers and the kind of technology and services they require put IBM "in a fairly unique position" compared with competitors.

For the year, IBM revenue topped $88.4 billion, compared with $87.5 billion a year earlier. Income reached $8.1 billion, or $4.44 a share. Analysts had projected $4.43 earnings per share for 2000. A year earlier, Big Blue's income reached $7.7 billion, or $4.12 a share.

"We had a very solid fourth quarter, which in many respects, reflects momentum that was building steadily all year," IBM CEO Lou Gerstner said in a statement. "On one level, this momentum is due to strong execution, and we have increased our market share in many of our most strategic product areas."

In regular trading, IBM shares closed at $96.69, up $3.94. The stock climbed to more than $103 in after-hours trading. In the past year, the shares have traded as high as $134.94 and as low as $80.06.

Analysts had been carefully watching IBM, one of the few major high-tech companies to not issue a fourth-quarter profit warning. Ongoing sales problems coupled with slowing corporate and consumer technology spending hurt Big Blue, but not as severely as some competitors.

Because of its size and array of business operations, "IBM is in a better position to spread out the impact of larger problems" affecting the entire computing sector, said Technology Business Research analyst Bob Sutherland.

"As we look to 2001," Gerstner said, "there is uncertainty about the economic climate in the U.S. However, IBM's broad portfolio should position us well relative to our competitors."

IBM posted overall hardware revenue of $11.4 billion, up 10 percent year over year. The PC division, as expected, reached its second straight quarter of profitability.

The PC division, which makes desktops, portables and PC servers, posted income of $34 million, down from $65 million in the third quarter. Sales of servers and notebooks rose, while desktops declined.

Joyce said the company's OEM (original equipment manufacturer) business, which makes components sold to PC builders, "reached double-digit growth; microelectronics maintained growth of over 30 percent, and hard disk drives finally shifted from a decline to a growth."

Joyce was uncharacteristically uncommunicative about IBM's mainframe and server business. During the third quarter, S/390 sales declined 24 percent in anticipation of the z900 server, which the company released in December. A shortage of ceramics used in chips also hurt RS/6000 and AS/400 sales in the third quarter.

As he has done in the past, Joyce did not fully review mainframe and hardware sales but did briefly address supply issues in response to analyst questions.

"We were supply-constrained in the fourth quarter," he said. "There will be more supply coming online in the first quarter. The supply-demand equation will come more in line in the first quarter. Whether it will come perfectly in line, I can't comment."

Ceramic shortages continued to plague IBM during the fourth quarter, but Joyce said the company would "bring additional supply online the first quarter."

Services revenue grew by 5 percent year over year to $9.2 billion, up from 4 percent during the third quarter and from 2 percent a year earlier. Software again took a beating, with revenue declining 1 percent to $3.6 billion. That compares with a 3 percent decline for the third quarter and a 2 percent increase a year earlier.

Revenue from the Americas was $10.8 billion, an increase of 3 percent year over year. Europe, Middle East and Africa declined 3 percent to $7.4 billion. Asia-Pacific grew 13 percent to $5 billion.

OEM revenue increased 13 percent year over year to $2.4 billion, while global financing revenue rose 6 percent to $1 billion.

Sales of custom hardware and software products to specialized customers declined 11 percent year over year to $425.

Gross profit margins rose to 37.7 percent from 36.7 percent a year earlier.

IBM's technology group earned $327 million in the fourth quarter, while PC systems made $34 million. Enterprise systems posted income of $912 million, while services pulled in $1.3 billion. Software earned $961 million and global financing $288 million.

For the year, revenue in the Americas declined 1 percent year over year to $38.6 billion, while Europe, the Middle East and Africa dropped 5 percent to $24.3 billion. Asia-Pacific sales grew 16 percent to $17.7 billion. Revenue from manufacturers declined 1 percent to $7.8 billion.

Annual hardware revenue reached $37.8 billion, flat compared with 1999. Services revenue rose 3 percent to 33.2 percent. Yearly software sales dropped 1 percent to $12.6 billion. Global financing revenue increased 10 percent to $3.4 billion.

The technology group posted annual earnings of $758 million; enterprise systems had $2.1 billion; services registered $4.5 billion; software had $2.8 billion; and global financing was $1.17 billion. The PC division lost $148 million, failing to break even, as some analysts had predicted.

Joyce said IBM's shift to direct sales--including those through the Web site--was paying off. For the year, brought in more than $9 billion in revenue. "Through, we are addressing existing customers through this more efficient channel, and increasingly, we are reaching new customers," he said. "About 31 percent of PC sales are direct," he added.

Despite uncertainties about the U.S. market, Joyce tried to reassure financial analysts. "We're entering 2001 with some momentum and a sense of confidence," he said. For now, Joyce said IBM remains "comfortable with the earnings per share estimate for 2001."

"In the face of uncertainty in the U.S., the size of our business in Europe and Asia can be an important counterbalance," he said. "Our revenues in Europe alone at over $24 billion were greater than Microsoft's on a worldwide basis."