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IBM profits hit, stock up

Citing deep PC discounts and the Asian economy, Big Blue posts its first year-over-year earnings decline in nearly two years.

Citing deeper-than-expected PC price cuts and weakness in the Asian economy, IBM posted a drop in first-quarter profits yesterday, its first year-over-year decline in nearly two years.

In early trading today, IBM shares hit a new high, rising to 116 per share; U.S. stocks soared as well. The Dow industrials were up almost 22 points to 9163.75, off a new intra-day high of 9189.67. The tech-heavy Nasdaq rose 9.72 points to 1896.86.

"Earnings are going well and there is still a lot of cash around," said Bill Allyn, head of trading at Jefferies & Company.

In addition, analysts boosted their ratings on the company, which topped Wall Street estimates by 1 cent. "IBM had lowered its forecasts and came in with a better number than anticipated," said Peter Coolidge, senior equity trader Brean Murray & Company. "That just reinforces the thought that technology earnings are not as bad as people thought a month ago, which is helping give technology a shot in the arm."

Morgan Stanley Dean Witter analyst Thomas Kraemer said today he had upgraded his rating on Big Blue to "outperform" from "neutral."

Kraemer noted his rating change was a bet on IBM's growth potential and the upgrade cycle he anticipates from the early shipment and better performance of IBM's Symphony mainframe. He added that if conservative estimates are correct, the company should be able to grow revenue in double digits in fiscal 1999, a performance not seen since 1995.

SoundView Financial Group analyst Gary Helmig raised his own fourth-quarter price target to $120 from $110.

IBM, like Hewlett-Packard and other computer makers, is feeling the pressure of excess inventory and pricing pressures. And The road ahead does not look much better: Computer manufacturers are expected to face declining shipments this year, according to International Data Corporation, which projects a 13 percent growth rate with about 90.6 million unit shipments this year, down from a growth rate of 15.2 percent in 1997.

The company Hewlett-Packard and other PC makers, See related story: 
Intel challenge costly reported net income of $1 billion, or $1.06 a share, for the period ending March 31, compared with $1.2 billion or $1.16 a share a year ago. IBM's last year-over-year profit decline occurred in the second quarter of 1996.

Analysts had expected the computer giant to post earnings of $1.05 a share in this most recent quarter, according to First Call. The company also cited one-time events, such as two acquisition charges and marketing expenses for the Winter Olympics.

IBM's Larry Ricciardi on quarterly earnings
"What we didn't expect was the extent of the turmoil that our PC business would undergo in the quarter as a result of extraordinary price pressures," said Larry Ricciardi, acting chief financial officer and general counsel.

Ricciardi said many of the same issues in the PC business are expected to continue in the near term, though he added that troubles from the Asia-Pacific economic crisis appear to have subsided.

"The environment in the near term has many of the same dynamics of the first quarter without the acquisitions and marketing investments. Pricing pressures in PCs, DRAMs, and [hard drives] are still considerable, although our competitive position continues to improve," Ricciardi said.

Strong performance in services and software, along with controlling costs, enabled the company to absorb much of the fall out from the pricing pressures, he said.

Revenues, meanwhile, reached $17.6 billion, up 2 percent over a year ago.

The company's noncomputer business performed IBM at a glance better than expectations. IBM chairman and CEO Lou Gerstner noted that, although the company expects PC pricing pressures to continue, IBM is pleased with the underlying momentum of those other businesses.

IBM's hardware sales fell 8 percent to $7.1 billion in the first quarter, compared with a year ago. In addition to falling PC prices, product transitions for its System/390 contributed to the decline, and RS/6000 revenues were flat. But among its hardware sales, storage products and semiconductor revenues grew.

Revenue from services rose to $5 billion in the quarter, up 22 percent over the previous year. Services, an increasingly large piece of Big Blue's revenues, brought in a gross profit margin of 21.1 percent for the quarter, up 1.6 points over a year earlier.

Software revenues rose a slight 2 percent to $3 billion for the period over the previous year, as sales of IBM's Tivoli Systems unit remained strong.

Maintenance revenues, however, fell 8 percent in the quarter to $1.5 billion. And revenues from rentals and financing rose 11 percent to nearly $1 billion in the first quarter.

Reuters contributed to this report.