IBM Warns of Sharp Downturn in Earnings
By Caroline Humer
NEW YORK (Reuters) - International Business Machines Corp. (NYSE:IBM - news), the No. 1 computer maker, on Monday warned of a huge first-quarter shortfall, blamed on corporate technology spending cutbacks, spurring a sell-off in its shares and global markets.
The warning -- the first in more than a decade for Armonk, New York-based IBM -- quickly sent waves of selling in equity markets around the world, as the U.K. and European stock exchanges fell sharply.
IBM shares opened down almost 10 percent in heavy volume. It was trading off $10.95, or 11.3 percent, at $86.30 after closing Friday on the New York Stock Exchange at $97.25. Over 17 million IBM shares traded hands in the first two hours of trade.
Even though there have been rumors in the last several quarters that IBM, the latest coming on Friday, the announcement still caught the market unawares.
The Dow Jones Industrial Average (^DJI - news) fell 86 to 10,185 while the American Stock Exchange Hardware Index (^HWI - news) was off 3.3 percent.
The warning comes only a month after IBM Chief Executive Samuel Palmisano took the reins from long-time head Louis Gerstner, who was credited with turning Big Blue around and making it profitable. Gerstner remains chairman through 2002.
Merrill Lynch analyst Steven Milunovich said in a research note he wasn't sure what to make of the timing of the warning.
``It is not clear to us as to whether the business is getting that much worse or this announcement reflects the inclinations of the new CEO. We believe that management may be inclined to set the earnings expectations lower going forward,'' Milunovich wrote.
IBM reports earnings on April 17.
IBM's earnings have come under scrutiny in recent months as investors and analysts questioned the company's accounting methods. In particular, Wall Street has criticized IBM for not providing enough information on their earnings, which may include gains on asset sales that some accountants say should be classified as one-time events.
TECH SLOWDOWN
The warning follows a year of dismal corporate technology spending that has hurt earnings and revenues at most tech companies. At the same time, Wall Street is looking for signs that a recovery has begun.
Given IBM's warning, which followed several warnings from software companies last week, that is not the case, one investor said.
``I think that as far as IT spending, we're still in a clamp-down mode. We're still in a deep recession mode,'' said John Rutledge, portfolio manager for the Evergreen Technology Fund, which holds IBM stock.
``Whether things get better later in the year, we don't know, but clearly the pressure is on IT managers to tighten budgets and IBM is feeling the pain,'' Rutledge said.
IBM said the company expected first-quarter revenue in the range of $18.4 billion to $18.6 billion compared with $21.0 billion a year ago. That will translate into earnings per share of 66 cents to 70 cents, down from 98 cents in the first quarter of 2001.
Prior to the warning, the consensus among financial analysts was for the company to post earnings per share in the range of 80 cents to 88 cents, with a mean estimate of 85 cents, according to Thomson Financial/First Call. Revenue estimates ranged from $19.3 billion to $20.8 billion.
IBM attributed the shortfall in part to its technology group, which makes items such as microchips for other companies. It said it expects that group's revenue to fall 35 percent, hitting its profit by $200 million before taxes, or 8 cents per share.
That division has long had issues and prior to the announcement, Rutledge said he had expected revenues to fall by 12 cents per share.
ALL ABOUT THE DEMAND
Gary Helmig, an analyst for Soundview Technologies, said the issue is one of corporate technology spending being off across the board rather than IBM losing ground to competitors such as Hewlett-Packard Co. (NYSE:HWP - news) or Compaq Computer Corp. (NYSE:CPQ - news)
Those two companies have proposed what would be the largest technology merger ever and are currently waiting for the final tally on a shareholder vote that they believe they won.
``We have no reason to believe they are not continuing to gain share. We think it's a demand issue, a wide demand issue,'' Helmig said.
The news hit technology companies' stocks as investors worried about more earnings warnings from other companies.
The DJ Stoxx European technology index (.SX8P) sank 4.1 percent to its lowest level since late February. Top name telecom equipment makers like Nokia (NOK1V.HE), Ericsson (ERICb.ST) and Alcatel (CGEP.PA), were all down between four and five percent.
The pan-European Eurotop 300 index (.FTEU3) was off 1.6 percent, with declining issues trouncing advancers by nine-to-one. |
