IBM earnings avoid tech carnage

The computer giant reports earnings of 98 cents a share, in line with analyst expectations, as it takes a smaller beating from the industrywide slowdown.

4 min read
IBM on Wednesday gave Wall Street some desperately needed good news, meeting first-quarter expectations.

The Armonk, N.Y.-based company earned $1.75 billion, or 98 cents a share, compared with $1.52 billion and 83 cents per share in the same period a year earlier. A consensus of analysts polled by First Call had expected earnings of 98 cents a share. IBM sales grew 15 percent year over year.

Sales grew 9 percent to $21 billion, from $19.3 billion during the first quarter of 2000. First Call consensus forecast revenue of $20.79 billion.

IBM chief executive Lou Gerstner noted some of the quarter's bright spots.

"Our Shark storage revenues grew 82 percent, he said in a statement. "At the same time, our Unix-based pSeries (server) revenues were up 33 percent, our PC-based xSeries revenues grew 14 percent, and z900 mainframe (sales) grew 40 percent."

IBM shares were up $6, or 5.6 percent, in after-hours trading Wednesday on the Island ECN.

IBM's first-quarter report follows a week chock full of bad news in the technology industry. Early Wednesday, Hewlett-Packard warned it would miss fiscal second-quarter sales and earnings estimates and lay off about 3,000 workers.

On Tuesday, Intel reported first-quarter income 82 percent below the previous year. Cisco Systems on Monday said it would miss forecasts for its fiscal third quarter and take a charge of up to $1.2 billion as part of a layoff of about 8,500 employees.

"I don't think IBM was hurt as bad as some of its competitors, mostly because the competitors are still doing a lot of the dot-com business IBM shied away from," said Technology Business Research analyst Bob Sutherland. "For that, they should be lauded for a levelheaded approach."

But not all the IBM news was good. An earlier reorganization hurt Big Blue's PC business, which posted a $58 million loss for the quarter. Gross margins rose slightly to 36.1 percent, from 35.8 percent a year earlier, but were down from 37.7 percent during the fourth quarter.

Gerstner agreed that "not all the news was good in the quarter. The desktop segment is hurting--and it is not just a cyclical issue," he said in a statement. "This is a mature business, and it no longer drives the economics of the IT industry."

Soft sales also continued to hurt IBM's software business, which showed flat growth year over year.

During a Wednesday afternoon conference call with Wall Street analysts, IBM Chief Financial Officer John Joyce emphasized that the company is less reliant on mainframes than in the past.

"Services, middleware and technology account for approximately 80 percent of our growth in the first quarter," Joyce said. "Hardware is still very important to our growth," but mainframes only accounted for 5 percent of IBM's revenue growth in the last quarter.

Global financing sales during the first quarter topped $832 million, up slightly from $816 million a year earlier. Revenue in the enterprise/other category fell to $276 million, from $341 million in the year-ago quarter.

Hardware accounted for about 41 percent of IBM's revenue, and services was 40 percent. Software made up 14 percent of sales, global financing 4 percent and enterprise/other 1 percent. Hardware revenue grew 11 percent year over year and services 12 percent. Software remained flat, while global financing grew 2 percent and the enterprise/other category fell 19 percent.

Joyce addressed IBM's forecast for the remainder of the year, something many financial analysts had been waiting for.

"We recognize that the U.S. market remains volatile and uncertain, and it is likely that other regions in this global market will feel some of the same pressures. We're certainly not immune to a major worldwide economic downturn," Joyce told financial analysts.

"We have not changed our opinion of full year 2001...With everything we know about the coming year, we remain on track for your consensus earnings per share estimate for 2001," he continued.

Consensus 2001 estimates are $4.87 per share, according to First Call.

Still, Joyce emphasized, "2001 will be a challenging year."

Sutherland noted that IBM benefited from an easy comparison, as first-quarter 2000 sales slowed in part because of the Year 2000 glitch.

"People seem to have short-term memory issues," he said. "IBM doesn't have to do a whole lot but continue what they did last quarter to beat expectations." He noted that IBM's sales rose only slightly compared with the first quarter of 1999, when the company reported $20.3 billion in sales.

Geographically, IBM's first-quarter sales topped $9 billion in North America, compared with $10.8 billion the previous quarter and $8.4 billion a year earlier. Sales in Europe, the Middle East and Africa rose to $5.6 billion vs. $5.4 billion during first quarter of 2000 and $7.4 billion during the fourth quarter. The Asia-Pacific region rose to $4.3 billion in sales from $4 billion in the year-ago quarter and $5 billion during the fourth quarter of 2000.

Hardware revenue topped $8.5 billion, compared with $11.4 billion the previous quarter and $7.7 billion a year earlier. Sales to original equipment manufacturers (OEMs)--companies that resell products under their own brand--reached $2.1 billion, compared with $1.4 billion the first quarter of 2000 and $2.4 billion during the fourth quarter.

Services sales reached $8.5 billion vs. $7.6 billion a year earlier and $9.2 billion in the fourth quarter. Software revenue topped $2.9 billion, level with the year-ago quarter and down from $3.6 billion during the first quarter of 2000.