IBM meets lowered estimates

update Big Blue meets revised first-quarter earnings expectations yet offers little in the way of specifics for what is to come in the second quarter.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
4 min read
update IBM on Wednesday met revised first-quarter earnings estimates, yet offered little in the way of specifics regarding its second-quarter financial outlook.

Big Blue earned $1.19 billion, or 68 cents per share, on sales of $18.6 billion for the quarter. During the same period last year, the company earned $1.75 billion, or 98 cents per share, on sales of $21 billion.

Analysts had been expecting a profit of 68 cents per share on sales of about $18.5 billion, according to First Call.

The company suffered through a big slowdown at the end of the first quarter and issued a rare earnings warning on April 8, telling analysts it would fall short of previous estimates.

IBM at the time said it expected to earn between between $1.65 billion and $1.75 billion or 66 to 70 cents per share. Revenue was expected between $18.4 billion and $18.6 billion.

Analysts had initially expected a first-quarter profit of 85 cents per share on revenue of $19.65 billion, according to First Call.

With the warning, Chief Financial Officer John Joyce said the company saw an "across-the-board weakness in revenues."

Apparently this came to pass. During the quarter, IBM's hardware business declined by 25 percent year over year. The Global Services business declined by 3 percent year over year.

Despite the losses, IBM CEO Sam Palmisano said he was "optimistic" that the second half would improve, yet offered few details with the financial report.

"While no one can predict the timing of a recovery, we remain optimistic that business conditions will improve later this year," Palmisano said in a statement.

"Our customers are telling us that information technology remains critical to the success of their businesses--and that they will continue to embrace IBM's e-business strategies, our products and our services," he said. "We remain confident about the fundamental strength of our business and about our prospects for the future."

IBM's outlook for the rest of the year was otherwise guarded.

But the company believes it can meet revised 2002 earnings per share and revenue estimates from analysts, Joyce said.

"We believe that recent changes to 2002 revenue and EPS estimates for IBM better reflect the current realities of the marketplace. Based on where we stand today, we should be able to make these estimates," he said.

Analysts expected IBM to earn 91 cents per share for the second quarter of 2002 on sales of about $19.7 billion, according to First Call. For 2002 as a whole, analysts expect IBM to earn $4.16 per share on revenue of about 83 billion.

The real profit killer for the quarter was IBM's Technology group, which includes its semiconductor and disk drive businesses.

IBM predicted in April the group would see a 35 percent drop in revenue and a loss of about $200 million, or 8 cents per share, for the quarter.

When the dust settled on Wednesday, the group saw revenue decline by about $75 million more than expected. Overall it declined by 37 percent year over year, losing $276 million for the quarter.

That decline equates to a loss of about 11 cents of earnings per share for the quarter and was more than half the quarterly year-over-year profit decline, Joyce said in a conference call with analysts and reporters.

IBM has already moved to stem the loss. The company inked a preliminary deal with Hitachi to combine the companies' hard drive operations into a new, stand-alone company. Hitachi, which would own 70 percent of the new company, would also pay IBM for its hard drive technology, the companies said.

Negotiations on the deal are ongoing, but analysts said it could save IBM 25 cents per share per quarter, according to a research note issued by Goldman Sachs on Wednesday. The report estimated that IBM's hard drive business lost between $600 million and $700 million before taxes in 2001, about 25 cents per share, and would probably lose about the same in 2002.

Meanwhile, IBM executives have also said the company is becoming more aggressive when it comes to licensing its chip and chipmaking technologies, such as its PowerPC processor and its chip manufacturing expertise, as evidenced by a recent expansion of its chip alliance with Sony and Toshiba. The deal was worth about $60 million, Joyce said.

The company has also begun introducing new services offerings during the quarter that package its own internal technology as a product. One such offering, administered by the Global Services organization, is an IBM Web portal.

While IBM's Technology group and Hardware group, which includes its server and storage product lines, slid as expected during the quarter, its other businesses fared somewhat better.

Meanwhile, IBM's Personal Systems and Printing group, which includes its PC business, saw a profit of $65 million despite a 19 percent decline in revenue. The profit came thanks in part to the sale of its manufacturing facilities Sanmina SCI.

Meanwhile, IBM's software business basically held the line, declining by 1 percent year over year.