IBM weathers downturn well

The Armonk, N.Y.-based company credits its services business, middleware-software and server sales for its performance.

Larry Dignan
4 min read
Fueled by sales of its high-end servers and services, IBM topped estimates Tuesday in its third quarter and said it should hit its targets for the fourth quarter.

For the third quarter, IBM reported net earnings of $1.6 billion, or 90 cents a share, on revenue of $20.4 billion. Compared with a year ago, IBM's earnings per share were down 17 percent. In the third quarter a year ago, Big Blue reported earnings of $2 billion, or $1.08 a share, on revenue of $21.78 billion.

According to First Call, the technology giant was expected to report a third-quarter profit of 89 cents a share on revenue of $20.86 billion. Wall Street analysts cut their earnings estimates from 95 cents a share following the Sept. 11 terrorist attacks on the World Trade Center and the Pentagon.

While IBM's third-quarter results were solid relative to what Wall Street was expecting, most analysts were waiting for Big Blue's outlook.

On a conference call with analysts, John Joyce, IBM's chief financial officer, said the company did see some order deferrals from U.S. customers following the Sept. 11 attacks but said it should be on track to hit fourth-quarter estimates because its services backlog "is as strong as we've seen."

"The fourth quarter will be challenging, and it's extremely difficult to make predictions in the current environment, but we believe the current earnings consensus is reasonable," Joyce said.

IBM is projected to report fourth-quarter earnings of $1.34 a share, according to First Call. Kimberly Alexy, an analyst at Prudential Securities, had expected IBM to cut its outlook to about $1.20 a share.

"When you put it all together, there's really not a lot to complain about," said J.P. Morgan analyst Daniel Kunstler, adding that IBM has weathered the economic downturn well. "Everybody seemed cool, calm and collected for good reason."

The Armonk, N.Y.-based company credited its services business, middleware-software and server sales for its third-quarter performance and outlook. Despite slumping sales from IBM's microelectronics business, the company has been able to offset that weakness by gaining share in storage, high-end servers, software and services, Joyce said.

"We continue to benefit from a broad portfolio," he said.

On the product front, IBM has made a series of key announcements recently. Earlier this month, Big Blue unveiled a new lineup of NetVista desktop PCs and ThinkPad notebooks and launched new servers to take on Sun Microsystems' latest Starcat server. In addition, IBM's acquisition of Informix is also expected to give the company a database-software boost and help it battle the likes of Oracle.

Simply put, IBM hasn't been immune from the tech slowdown, but it has performed significantly better than rivals such as Sun Microsystems, said analysts. Indeed, Joyce said IBM is gaining market share on key rivals such as Sun, EMC and BEA Systems.

In a statement, IBM CEO Lou Gerstner said the company performed well in light of a tough economy and touted the fact that Big Blue is delivering solid results when other tech companies "have been reporting huge revenue declines and vastly lower profits or losses for the first time in many years."

For the third quarter, IBM said its services business remains strong, up 5 percent to $8.7 billion. Excluding maintenance, services revenue was up 7 percent. Hardware continued to be a weak spot as sales fell 21 percent from a year ago to $7.5 billion.

Despite the weak hardware sales overall, IBM was upbeat about its server revenue. It said revenue from its z900 mainframe servers grew strongly. Midrange servers also increased in all geographic areas.

The company said sales from its high-end storage products, known as "Shark," were up 14 percent. Software revenue, led by middleware and database products, gained 10 percent for the quarter.

IBM does have its trouble spots, however.

PC sales were down 29 percent in the third quarter compared with a year ago, and sales of ThinkPads fell 28 percent. To remedy the problems, Joyce said IBM has cut its inventory 25 percent and cut expenses.

IBM's chip business didn't do much better, falling 30 percent from the second quarter, in what Joyce called a "severe industry downturn."

But Joyce noted that IBM's chip business is important to the company and the semiconductor industry appears to be bottoming out.

For 2002, IBM said it remains upbeat, but didn't provide much of an outlook because the timing of an economic rebound is tough to call. "When the economy recovers, we expect to be in an even stronger position," Joyce said.