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Tuesday July 20, 9:48 PM,,,,FOCUS-IBM shares fall amid an uncertain outlook
By Eric Auchard
NEW YORK, July 20 (Reuters) - International Business Machines Corp. (NYSE:IBM - news) posted better-than-expected second-quarter results, but Wall Street reacted with a heavy dose of caution to the computer maker's outlook for the rest of 1999.
IBM shares tumbled $6.31 to close at $128.44 on the New York Stock Exchange Tuesday, as investors retreated from recent record price levels in the absence of compelling new reasons to buy the stock after Monday's quarterly financial report.
''As expected, another good quarter,'' Salomon Smith Barney analyst John Jones said after the report. But he noted how IBM stock has ''had a huge run...I don't think you'll see the stock duplicate that over the next 12 months.''
The slide came on the heels of a 150-percent gain in the stock price on the New York Stock Exchange over the past 12 months. That surge reflected a view that IBM had transformed itself into a diversified supplier of electronic business s months. That surge reflected a view that IBM had transformed itself into a diversified supplier of electronic business s ervices and was shifting into high-gear.
Late Monday, the world's top computer maker reported second-quarter operating earnings of 91 cents per share, 3 cents ahead of expectations, on 16 percent revenue growth, driven by strong gains in services and hardware.
The stock tumble came in spite of optimistic comments IBM Chief Financial Officer Doug Maine in a conference call with analysts that followed the earnings report Monday night.
Later Monday, in an interview with Reuters, Maine reiterated his positive outlook for the remainder of 1999.
''I certainly hope so,'' he replied in response to a direct question about whether he meant to convey an upbeat outlook.
As an example, Maine pointed to what he said were more than 7,000 e-business consulting contracts on which IBM's fast-growing IBM Global Services business was now at work.
On Tuesday, brokers reiterated positive recommendations on IBM. Some made slight upward adjustments on earnings estimates, even as they warned of uncertainties around Big Blue's financial results and share price later this year.
''The slowdown in profit momentum could cause the stock to pause since it's a bit overbought,'' Merrill Lynch analyst Steve Milunovich said in a note to brokerage clients.
Still, Milunovich continued to recommend the stock. ''IBM is at the head of the technology parade,'' he said, noting that IBM has had faster and more consistent growth than many companies with higher stock valuations.
Nonetheless, because IBM has become the beneficiary of the rush by established companies to develop Internet business, Jones said he believed IBM can continue to outperform the stock market overall in the coming year.
Financial analysts nudged up their earnings targets in the wake of the second-quarter report, although by minor amounts.
The consensus for IBM's 1999 year moved to $3.91 per share from the $3.86 prior to the report, and to $4.50 from $4.44 for the 2000 year, according to First Call Corp., which surveys broker estimates. Nineteen of 21 analysts who track IBM had revised their estimates on First Call's service by midday Tuesday.
Most analysts have calculated in slower rates of revenue growth in the second half -- about 10 percent or lower -- down from roughly 15 percent in the first half of 1999.
Despite the strong second-quarter, BancBoston Robertson Stephens analyst Daniel Niles was moved, ''given the valuation and uncertainties related to Y2K in the corporate sector'' in the second half of 1999.
He was referring to the hefty gains in IBM shares over the past year and to fears IBM results might be hobbled if corporate spending on new computers grinds to a halt as customers fix possible Year 2000 glitches in older equipment.
Merrill Lynch said slowing profit growth in the 1999 second half could occur in the face of difficult comparisons with strong year-ago results, the negative effects of a strong U.S. dollar on IBM's overseas business, and the potential for a fourth-quarter Y2K repair slowdown.
But SoundView Technology analyst Gary Helmig said he was surprised by the IBM stock drop Tuesday, based on the computer maker's impressive double-digit 1999 first-half revenue growth and his sense that IBM has set up a financial buffer to ensure a continued strong performance in the second half of the year.
''It would appear that IBM brought ahead some of their ongoing restructuring costs into the second quarter to provide a cushion for results in the second half,'' Helmig told Reuters.
''Once again IBM told analysts they should not change their numbers even though they've beat them two quarters running,'' Helmig said. ''They are setting up themselves to over-acheive expectations in the third and fourth quarter.''
IBM has soundly beaten Wall Street expectations in the first two quarters of 1999.
The sharp drop in IBM's share price on Tuesday fueled a 192-point retreat by the Dow Jones industrial average, which closed at 10,996.13. It was the fifth-biggest single-day point drop this year, and a 1.71 percent overall decline.
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Tuesday July 20, 10:26 PM,,,Texas Instruments Q2 earnings up sharply
(Adds stock price drop in para 3)
By Marcus Kabel
DALLAS, July 20 (Reuters) - Texas Instruments (NYSE:TXN - news), riding a wave of demand for high tech communications using its semiconductors, said on Tuesday that second quarter net earnings jumped to $325.0 million, or 83 cents per basic share, from $43 million or 11 cents a year earlier.
Excluding special charges, TI's earnings per share were 92 cents, beating Wall Street estimates of 86 cents as compiled by financial analysis group First Call.
Despite the strong results, the company's shares fell $8.94 to $141 in consolidated New York Stock Exchange trading on Tuesday, part of a general sell-off in technology stocks by profit-taking investors.
Earnings were $372 million, excluding charges, as against $142 million in the second quarter of 1998, ''primarily due to the absence of losses from the divested memory business and also increased profits in semiconductors,'' the company said.
TI sold its computer memory (DRAM) chip business to Micron Technology Inc. (NYSE:MU - news) in the third quarter of 1998 as part of restructuring to focus on semiconductors for voice and data communications, including wireless phones and computer modems.
As a result it has returned to high growth rates fueled by demand for products using its Digital Signal Processors (DSPs), widely used in mobile telephones and other voice communications, and analog chips, which convert real-world information into digital form that computers understand.
''We're very pleased with these results and think they are evidence of the progress we're making,'' Chief Financial Officer Bill Aylesworth told Reuters by telephone.
TI also poured on the growth in sales and margins when compared with the first quarter, a more accurate reflection of the company's new structure.
Revenues of $2.35 billion were up only 8 percent from a year ago, before the DRAM division was sold, but rose 15 percent from the first quarter's $2.04 billion.
Operating margins rose 5.5 percentage points from the first quarter to 21.4 percent, more than double the year-ago rate.
Aylesworth said about half the margin increase from the previous quarter stemmed from catch-up royalties of $85 million from South Korea's Hyundai Electronics Industries, part of a cross-licensing deal signed after TI pressed a patent infringement lawsuit. The Hyundai payment added 12 cents to earnings per share.
The other half of the margin growth came from ongoing efforts by TI to use capacity efficiently, hold costs flat and boost revenues, Aylesworth said.
Aylesworth said the pace of sales growth in TI's core semiconductor products will continue rising in the second half of 1999.
Revenues from DSP, which rose 16 percent year-on-year in the first quarter, were up 23 percent in the second quarter, while analog sales, which were flat in the first three months of this year, grew 14 percent in the second quarter.
''We think that growth (in DSP and analog) will accelerate,'' Aylesworth said.
''A measure of that I think is if you look at our order rates in semiconductors in the second quarter. Orders were up 46 percent compared to the second quarter a year ago and those increases are heavily in the area of DSP and analog,'' he said.
Revenues typically lag orders by about one quarter, he said.
TI, whose DSPs are used in an estimated two out of three digital cell phones on the market, also made two acquisitions in the second quarter aimed at securing a similar major role in the emerging market for high capacity broadband communications.
It acquired Telogy Networks, which makes software for voice communications over the Internet, and Libit Signal Processing Ltd, which makes chip sets for cable modems.
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Tuesday July 20 5:58 PM,,,,,Lucent Profits Jump 60 Percent But Stock Drops
NEW YORK (Reuters) - Lucent Technologies Inc. (NYSE:LU - news), the world's largest maker of telecommunications equipment, Tuesday posted a stronger-than-expected 60 percent jump in fiscal third-quarter profits, due to growth overseas and strong demand for products that build and improve phone networks.
Wall Street, however, all but ignored the robust results, focusing instead on word that although Lucent's overall profit next year would exceed current forecasts, its first quarter profit likely would fall short as it works to smooth out its business cycle.
That forecast, coupled with broader weakness among technology and telecom equipment maker stocks, helped trigger a sell-off in Lucent shares. The stock ended down $6.19, or more than 8 percent, at $69.54 in heavy trading on the New York Stock Exchange.
Lucent's stock fall and its results also came one day after the company lost senior executive Carly Fiorina, who resigned to become president and chief executive of Hewlett-Packard Co. (NYSE:HWP - news) . and to be the first woman to lead a Dow 30 company.
Lucent said profits, before acquisition-related charges, rose to $829 million, or 26 cents per share, from $518 million, or 17 cents, a year earlier. Wall Street expected the company to earn 23 cents, according to the research firm First Call Corp.
Lucent, based in Murray Hill, N.J., has topped Wall Street earnings expectations every quarter since it was spun off from AT&T Corp. in 1996. Lucent's revenues for the quarter ended June 30 rose 22 percent to $9.32 billion, compared with $7.64 billion.
After releasing its third quarter statement, however, Lucent called analysts to tell them about the adjustments to the fiscal 2000 forecast, analysts said.
''Management is giving guidance that fiscal 2000 earnings should be 5 to 7 cents ahead of the current consensus, but that (due to) the seasonality of those earnings...December is likely to be below the current consensus, with the rest of the quarters considerably higher,'' said Paul Sagawa, a telecommunications equipment analyst with Sanford Bernstein.
Wall Street's consensus earnings estimate for the first quarter of fiscal 2000 is $0.57 a share, and $1.48 for the full year, according to the research firm First Call.
Lucent declined to comment on its specific forecasts fiscal 2000 but it said its outlook for the year is strong. Lucent Chairman Rich McGinn said in a telephone interview that he expects the company to grow about 3 to 5 percentage points above the industry's growth rate of 14 percent.
Sagawa said Lucent's business outlook remains strong but the company has been working to distribute its sales throughout the year instead of having the bulk of its business reported in the December quarter. Therefore, some analysts may trim their estimates for December but raise expectations in other quarters, he said. ''The irony here is that a couple of years ago the analysts were concerned that we were so strong in that quarter vis-a-vis the other quarters that we've been working to smooth the business out ... I think we've been successful here in getting that smoothness,'' McGinn said.
In the third quarter, Lucent saw strong demand from both established and emerging service providers and across geographic regions. International sales increased 48 percent in the quarter and now represent about 30 percent of the company's total sales.
Including costs related to its $24 billion acquisition of data networking company Ascend Communications Inc., net income was $750 million, or 24 cents a share. A year ago, the company reported a loss of $150 million, or 5 cents, after one-time charges from its acquisitions of Yurie Systems and Optimay.
Sales of equipment and services to telecommunications companies and network operators rose 27 percent to $6.09 billion. The increase was driven by sales to local and long distance companies, wireless service providers and continued demand for increased network capacity, Lucent said.
Lucent saw some weakness in sales of communications equipment to businesses, as sales increased only 4 percent to $2.10 billion. Strong sales of its Definity Enterprise Communications Server, a phone switch capable of handling large businesses, were partially offset by decreased sales of its Systimax cabling systems for corporate campuses.
Systimax's sales declined due to increased competition and pricing pressure, Lucent said. McGinn said the company is looking at several ways of to address that weakness, including restructuring or possibly shedding the unit.
''We need to have all parts of the business growing and taking share in that market. To the extent that we can't do that, then we've got to restructure the business,'' McGinn said. ''We expect to continue to sell businesses that don't fit our portfolio for growth performance in the top line and the bottom line,'' he said.
Sales in its microelectronics unit, which makes semiconductors for phone equipment, increased 23 percent to $902 million due to strong demand for components and customized chips for high-speed communications, data networking systems and wireless systems.
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