IBM 5.2% Revenue Rise Trails Forecast;Firm Warns of a Y2K Profit Slowdown
By JON G. AUERBACH
Staff Reporter of THE WALL STREET JOURNAL
International Business Machines Corp. reported a tepid 5.2% revenue gain
for the third quarter and warned of earnings weakness through year end, a
one-two punch that raises fresh concerns about a year-2000-related
slowdown in the technology sector.
The stunning news from the world's largest computer maker caused IBM's
shares to fall $7 Wednesday in after-hours Instinet trading to $100 after
closing in composite New York Stock Exchange trading at $107, down
12.5 cents. Before the release of IBM's earnings, the shares had risen
$6.1875 to $112.75 in regular Big Board trading. If IBM's stock is hit in
trading Thursday, every dollar it drops will send the Dow Jones Industrial
average down five points.
Perhaps most ominously for investors, IBM
said it experienced a sales slowdown toward
the end of the quarter related to customers'
concerns over year-2000 computer snafus.
Having spent heavily to repair software that
may otherwise be unable to function after the
turn of the century, many companies are said to be delaying purchases of
new systems until they see whether their fixes work.
Mainly because of the Y2K effects, IBM warned that fourth-quarter profit
may be 15 to 20 cents a share below the year-earlier period, coming up as
much as 29 cents shy of analysts' estimates of $1.33 a share. IBM warned
of continued Y2K effects "into next year."
Negative Y2K Effect
IBM's results highlight just how unevenly the Y2K bug is affecting
technology companies. Both Microsoft Corp., which reported ebullient
earnings Tuesday, and EMC Corp., the No. 1 high-end data-storage
vendor, reported negligible Y2K effects, and IBM shares rose this week
on Microsoft's news. But IBM's hardware business was walloped.
IBM's negative Y2K effect has a lot to do with the company's reliance on
mainframe computers, which are particularly susceptible to the computer
glitch, because many were built before computer makers were generally
aware of the Y2K risks.
Many mainframe customers revamped their software or bought new
machines as early as last year, hoping to have the Y2K problems under
control well before the looming Jan. 1 date. Getting the fixes done early
was important because of the crucial sales figures and other financial data
generally stored on mainframes.
But as recently as a few months ago, IBM had said it wasn't feeling serious
Y2K effects, which lulled investors into a false sense of confidence,
analysts say. IBM's results "sort of answer a lot of our questions," said
Steven Milunovich of Merrill Lynch in New York. "There is a Y2K effect."
A 'Decidedly Mixed' Quarter
IBM's net income rose 18% to $1.76 billion, or 93 cents a diluted share,
including a pretax gain of $201 million from a sale of parts of IBM Global
Network to AT&T Corp. and one-time charges. In the 1998 third quarter,
IBM's net was $1.49 billion, or 78 cents a share.
Excluding special items, IBM's income of $1.69 billion, or 90 cents a
share, was in line with analysts' expectations. But its $21.1 billion in
revenue, up from $20.1 billion a year earlier, was significantly below Wall
Street projections. Computer-hardware sales, which had been expected to
grow modestly, instead fell by 1%. IBM Chief Executive Louis V.
Gerstner called the quarter "decidedly mixed."
Mr. Gerstner said the company's growth also was hindered by tough
competition in the components-vending business and by shortages in parts
it buys, caused by supplier disruptions including the Taiwanese earthquake.
IBM said it had strong results in software, services and its
original-equipment manufacturer business.
The results contrasted sharply with the strong earnings results from
Microsoft. In the wake of that report, investors bet up IBM stock, and the
market as a whole, banking on yet another high-technology lift.
Hardware Sales Slip
Instead, hardware sales, a much-watched barometer of year-2000 fears,
edged down to $8.8 billion. Most analysts had been expecting hardware
growth of between 3% and 4%.
Merrill Lynch's Mr. Milunovich called IBM's just-ended quarter the
"worst-case scenario... . They didn't just hit a pothole, they fell into a
10-foot hole."
Chief Financial Officer Douglas L. Maine said earnings per share for 1999
will most likely fall between $3.62 and $3.67, below the $3.91 analysts'
consensus.
Big Blue said in its first quarter next year, earnings should be "flat to slightly
below" the first quarter of 1999, when IBM recorded 77 cents a share.
But after the first quarter, IBM says, it sees the negative effects from Y2K
abating. Mr. Gerstner said next year "has the potential to be a very good
year for IBM, once we get past any lingering Y2K effects."
On the important hardware side, IBM said it was hurt by weak demand
across much of its computer-server line. Overall, server revenue fell by
about 30% to $2.02 billion, IBM said. The server unit's pretax income
dropped by 60% to $295 million.
Losing Share to Competitors
IBM attributed the server shortfall to customers' Y2K buying delays. But
the company also is losing market share broadly to competitors including
Sun Microsystems Inc. The disappointing results further explain IBM's
recent decision to put one of its strongest executives, Samuel J. Palmisano,
in charge of the server unit. Mr. Palmisano, seen as an heir apparent to Mr.
Gerstner, has overseen IBM's $30 billion computer-services business.
IBM is especially losing out to Sun in the lucrative market for midrange
servers costing between $100,000 and $1 million, according to
International Data Corp. In the market for larger mainframe servers, IBM
remains No. 1 but faces competition from Sun. Sun entered the higher-end
market about two years ago, now has a 10% market share and is growing
more quickly than IBM, which has a 47.3% market share, according to
IDC. IBM said mainframe sales in the quarter fell by about 40%.
Big Blue showed signs of continuing to improve its personal-systems
group, which includes desktops, laptops and small computer servers. The
company said it recorded strong sales of ThinkPad laptops but continues
to have difficulty making money on desktops. Overall, the
personal-systems group had a pretax loss of $69 million, improved from a
$122 million pretax loss in the year-earlier period.
IBM said earlier this week it was abandoning retail-store channels for
selling consumer desktop PCs, but would keep selling them over the
Internet.
IBM said revenue at its global-services unit grew by 12% to $7.9 billion,
below the $8 billion analysts had been expecting. Mr. Maine attributed the
shortfall to a Y2K-related slowdown of business-software consulting and
installation. |
