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Huge quarter for Big Blue

Big Blue soared this morning, pulling other tech stocks up with it, after IBM soundly beat most earnings estimates and reported that net income grew by a whopping 42 percent.

Big Blue soared this morning, pulling other tech stocks up with it, after IBM soundly beat most earnings estimates and reported that net income grew by a whopping 42 percent.

Stocks rose in early trading this morning as Wall Street reacted to IBM's dazzling earnings. IBM traded as high as 198 this morning.

The Dow Jones industrial average jumped about 50 points early this morning after soaring 133 points yesterday to a record close, while the Nasdaq Composite index jumped about 40 points to 2,529.49.

After market close yesterday, IBM reported first-quarter 1999 earnings per share of $1.55 compared with $1.06 in the first quarter of 1998. This beat the consensus estimate of $1.41.

IBM's earnings-per-share, net income, and revenue results were all first-quarter records, according to the company. Net income totaled $1.5 billion compared with $1 billion in the first quarter of last year. Revenues grew 15 percent to $20.3 billion.

Nearly all of the financial analysts on the conference call seemed stunned and complimented IBM on the quarter. Part of the upbeat tone, no doubt, comes from the recent shocks at Compaq. Compaq reported lower-than-expected profits yesterday, and ousted chief executive Eckhard Pfeiffer earlier in the week.

"Our PC unit also had substantially improved results," said Lou Gerstner, IBM chairman and chief executive officer, in a prepared statement. The performance of the PC units had been a particular concern for analysts.

Still, IBM's PC results were a mixed bag, partly because of an aggressive bid to boost market share. Revenue in personal computer systems jumped over 48 percent to $3.5 billion, but it posted a pretax loss of $89 million. Overall, IBM experienced a slight decline in gross margins from 36.6 percent to 35.7 percent.

Regionally IBM did well. "We saw a significant improvement in our business in Asia, and we also had double-digit revenue growth in Europe and the Americas," Gerstner said.

Douglas Maine, IBM's chief financial officer, also cited research firm reports that said it regained the No. 1 position in the database market from Oracle.

However, Gerstner added that the Technology Group, which sells a wide range of OEM computer components, "were mixed, with growth in hard disk drives offset by continued weakness in memory chips." Maine added, however, that there were competitive "pressures" in hard drives too.

Solid operating results were led by services and software, "which together produced 60 percent of our gross profits this quarter."

Excluding revenues from the company's OEM component business, first-quarter revenues from the Americas totaled $8.8 billion, an increase of 13 percent compared with the first quarter of 1998. Revenues from Europe/Middle East/Africa were $6.3 billion, up 20 percent. Revenues from Asia-Pacific increased 20 percent to $3.5 billion.

OEM revenues totaled $1.8 billion in the first quarter of 1999, a 5 percent increase compared with the year-earlier period. Total hardware revenues were $8.6 billion in the first quarter, an increase of 17 percent from the first quarter of last year.

"Despite industrywide weakness in PC demand...our data for January and February indicates that IBM is one of the strongest vendors with respect to sell-out, as the company gained substantial market share in the dealer desktop category," said Don Young of PaineWebber.

But he added: "However, we believe the most important risk to IBM revolves around PC [profit] margins, rather than demand."

Some Wall Street observers say that though Big Blue's PC business was on track, they are cautious about revenues prospects its RS/6000 servers and workstations, and its AS/400 business computers.

PaineWebber said that their "tracking results" showed no weakness in mainframe demand during the first quarter and "we believe Y2K may have a positive impact on server demand in the half of 1999, consistent with the results Unisys reported last week." But revenue continies to fall due to a 45 percent decline in dollars per Mips consistent with fourth quarter performance," PaineWebber added. Dollars per Mips refers to the perennial, accelerating trend of getting more computing power (Mips) for less money.

Merrill Lynch' Steve Milunovich expects to see continued improvement throughout 1999 in IBM's "technology" business which sells components such as hard drives, memory, specialized ASIC chips, and liquid crystal displays. IBM last month signed multi-billion dollar deals with storage giant EMC and Dell Computer to supply components and subsystems.

The investment house also believes continued growth in hard-drive sales will offset plummeting memory chip sales. An IBM executive said recently that the company is pulling out of the DRAM memory business.--which dragged down earnings today.

Services, software doing well
Services continue to do well. Services remains IBM's "growth driver," said Goldman Sachs. Also, Merrill Lynch said it too expects services to be in that range through 1999.

Software is also expected to be solid. IBM's services and software businesses constitute about two-thirds of total pretax profits, "contributing to IBM's predictability despite a volatile hardware business," said Goldman Sachs.

"In 1998, the major profit swing factors were PCs and Technology (negative) and Software and Services (positive). We expect this year it will be PCs and Services (positive). Currency could provide one-third of the pretax improvement," Merrill Lynch said.

Buttressing its software and services business is a bevy of major deals cut worldwide in the last two months:

• IBM agreed to a $200 million contract with British Telecommunications to provide computer systems, software, and technical services.
• IBM Global Services signed a $160 million, seven-year deal with London-based Co-operative Bank to manage the firm's cash machine network.
• IBM signed a five-year, $400 million deal to manage the computer operations of U.S. retailer Dayton Hudson.
• Mitsubishi Trust & Banking reached a basic agreement on a 10-year contract worth about $339 million to use services from IBM Japan for Mitsubishi Trust's system management.
• IBM entered into a partnership with Spain's largest publicly traded company, Telef?nica. Analysts said the deal could be worth billons of dollars.

Reuters contributed to this report.