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IBM's earnings dented by Y2K but beat expectations

Big Blue reports quarterly earnings of $1.12 per share, beating revised expectations and showing that the impact from the technology glitch was minimal.

IBM reported earnings of $1.12 per share today, beating revised expectations and lending credence to rumblings this week that the gloomy predictions of Y2K fallout in Big Blue's fourth-quarter earnings were overstated.

IBM announced earnings of $1.12 per share, or $2.1 billion, on revenues of $24.18 billion for the quarter. This is down from earnings of $1.24 per share for the same period last year.

Overall, however, 1999 represented a growth year. Earnings for the year came to $7.7 billion, or $4.12 per share, up 22 percent from earnings of $6.3 billion, or $3.29 per share. Revenues came to $87.5 billion, up seven percent over revenues of $81.7 billion in 1998.

Wall Street analysts polled by First Call expected an average of $1.06 per share. Analysts revised their expectations based on guidance from IBM in meetings in October and December.

At 1 p.m. PST, the close of regular trading, IBM shares were down 25 cents to $115.50.

Previously, IBM predicted lower profits due to ramifications from spending patterns associated with Y2K preparation plans for large corporate customers. Many large companies stopped buying new technology products after the second half of 1999 as they focused on testing existing equipment for Y2K glitches.

"The Y2K issue should not overshadown the fact that 1999 was a good year for IBM. We had record net income and earning per share and our e-business revenues grew at an extraordinary rate," said CEO Louis Gerstner in a prepared statement. "In addition, we generated strong cash flows, completed 17 acquisitions and spent $6 billion on capital expenditures."

Problems among corporate PC buyers are far from over, however. Yesterday in its earnings announcement, Microsoft warned that large companies are not going to rush to buy new computers with its Windows 2000 operating system, and that corporate PC sales may remain sluggish through the quarter. Microsoft shares, along with many technology issues, dropped today as a result.

Overall, fourth-quarter earnings were dragged down by sluggish PC and high-end server sales, according to John Joyce, IBM's chief financial officer, who spoke to investors in a conference call after the earnings were released. Joyce predicted that some customers' "Y2K lockdown" in technology spending would continue throughout 2000.

"The Y2K lockdown was very real," Joyce said. "It did not affect all our customers or products and services the same, but it certainly impacted our large customers."

Yesterday in its earnings announcement, Microsoft warned that large companies are not going to rush to buy new computers with its Windows 2000 operating system, and that corporate PC sales may remain sluggish through the quarter. Microsoft shares, along with many technology issues, dropped today as a result.

IBM's hardware revenues, pulled down by slow server sales, were the hardest hit by Y2K spending, dropping 11 percent from the same period last year. In addition, many companies stopped spending on IBM's systems integration and e-business consulting as the year wound down, Joyce said.

"The lower mix of servers brought profit margins down," he said, noting that spending among financial and insurance customers was down 4 percent in the second half of the year, after increasing during the first half.

Bloomberg contributed to this report.