IBM reports improved results

IBM shows improved results for the September quarter and beat expectations due to continued strength in services, some servers, and commercial PCs.

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IBM (IBM) showed improved results today for the September quarter. The company beat expectations due to continued strength in services, some servers, and commercial PCs, as well as Lotus Notes and Tivoli distributed software.

At the same time, there was ongoing weakness in consumer PCs and two key server products--the RS/6000 and the AS/400--which were undergoing major transitions.

IBM also said currency had a significant adverse impact IBM at a glance on its results, which may produce a negative impact in the fourth quarter as well if current conditions remain stable, Lawrence Ricciardi, IBM's interim chief financial officer, said in a conference call.

The company noted, however, that its diversified product and services portfolio offset those negative factors.

IBM reported third-quarter 1997 earnings of $1.4 billion, or 1.38 per share, compared with earnings of $1.3 billion, or $1.23 per common share, during the third quarter of last year. Analysts expected profits of 1.36 a share for the quarter, according to First Call.

Third-quarter 1997 revenues increased 3 percent year-over-year, to $18.6 billion, compared with revenue of $18.1 million last year. Excluding currency considerations, the company would have reported an 8 percent increase in revenue.

Ricciardi said that this was a tough quarter for the company, with "never-ending price pressures everywhere." He added that IBM gained market share in the commercial sector, but lost in the consumer market as sub-$1000 machines gained popularity.

"We targeted the higher end of the consumer arena. The products were well-received by customers and industry analysts, but the competition moved faster into the low end than were able to," Ricciardi said, noting that he feels the problem can be fixed. However, he did not mention the company's strategy for targeting the lower-end market segment.

Geographically, revenue from North America was $8.7 billion, an increase of 7 percent from the same period in 1996. Asia-Pacific revenue grew 7 percent, to $3.8 billion, and revenues from Latin America increased 10 percent, to $891 million. Revenues from the company's Europe/Middle East/Africa unit declined 6 percent, to $5.2 billion.

The largest growth in revenue was in the service area. Approximately $9 billion in new services contracts were signed during the quarter, the company said.

Jay Stephens, an analyst at Buckingham Research, reduced his revenue and earnings forecast last week for IBM's September quarter to $1.30 from $1.37. He also reduced his 1997 forecast to 6.18 from 6.25, based on less-than-robust results reported by other companies.

Those results took their toll on the markets as a whole, and IBM lost about 9 points last week to close Friday at 95-7/16. Today, however, IBM gained a notch to end the day up 2-1/16 at 97-1/2.

The September quarter server demand was below expectations in the industry, and currency translation was more severe than originally expected, added Stephens.

Going forward, however, James Poyner, an analyst at Oppenheimer, expects IBM's hardware revenue growth to pick up in 1998 due to product improvements in UNIX, a slowing in the price decline for S/390 MIPS, high growth in NT workstations, and continued success in disk drives. Poyner added in a recent report that he expects maintenance revenue to trend slightly lower in 1998, while rental and financing revenue growth should pick up some as leasing becomes more widespread.

He forecast total revenue growth of about 10 percent in 1998--to $86.7 billion from 1997's $78.6 billion--aided by flatter currency comparisons. Poyner's preliminary revenue estimate for 1999 is $92.4 billion.

Stephens said IBM continues to balance its worldwide business portfolio and noted that the company's new staff-reduction program is an attempt to improve operating income growth in 1998.

Last week, in a cost-cutting move that could eliminate several thousand jobs, IBM began offering employees a voluntary job buyout plan. The move came just as IBM announced it was reorganizing poorly performing divisions, such as its software and consumer PC divisions, while trying to expand the company's growing businesses, such as computer services.