IBM Meets 2nd-Quarter Estimates,
Sees Weakness in PCs, Hard Drives
By William M. Bulkeley
Staff Reporter of The Wall Street Journal
International Business Machines Corp. lived up to analysts' expectations for second-quarter earnings, but warned that slowing semiconductor sales are likely to push profit below forecasts in the current quarter.
The No. 1 computer maker said that net income rose 5.4% to $2.04 billion, or $1.15 a share, in the quarter from $1.94 billion, or $1.06 a share, a year ago.
Revenue, hampered by an 18% decline in personal-computer sales and the negative impact of the strong dollar, fell by less than 1% to $21.57 billion from $21.65 billion. That slippage came as a surprise to Wall Street and industry analysts, but if the dollar had remained steady, revenue would have risen 5%, IBM said.
Analysts had generally expected net income of $1.15 a share, according to Thomson Financial/First Call, with a range of estimates from 15 analysts of $1.08 to $1.22 a share. Revenue had been expected to grow between 2.7% and 5%.
IBM's per-share results were helped by continuing stock buybacks on which it spent $1.2 billion during the quarter. That reduced shares outstanding to 1.74 billion from 1.77 billion a year earlier. Big Blue also got a slight boost from reducing its tax rate to 29.5% from 30% a year ago.
Unlike almost all other computer makers, IBM had been expected to report sales and earnings growth, partly because its year-ago quarter was weak, and partly because its heavy mix of services makes it less vulnerable to cutbacks in computer purchases.
Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., said the report "wasn't an unmitigated disaster," but he said he will be cutting his estimates of third-quarter earnings by around 10 cents a share and fourth-quarter results by a little less. Before the call, consensus earnings estimates for the third quarter were $1.13 a share and full-year estimates were $4.82 a share, up from $4.44 a share a year earlier, according to First Call.
IBM's year-ago quarter results were depressed by a fall-off that followed the binge in corporate spending on potential problems related to the year-2000 computer bug.
IBM reported its results after the 4 p.m. Wednesday close of regular New York Stock Exchange composite trading. At that hour, its shares were off $4.25 to $104.28. In after-hours trading, the stock fell to $100.92.
John Jones, an analyst with Salomon Smith Barney, said, "No one is immune to a macroeconomic slowdown, and we knew there was a high probability the second half" estimates would be cut. However, he noted that most of IBM's businesses are producing profits and "taking market share from" competitors.
Almost all of IBM's growth in the quarter came from its global-services business, whose revenue grew 6.8% to $8.74 billion. That equaled 40% of total revenue and exceeded hardware sales for the first time. Much of the services revenue is prebooked in long-term outsourcing contracts under which IBM runs computer operations for big customers. IBM said it signed $16 billion in new services contracts, bringing its backlog to $95 billion, up from $87 billion at the end of the first quarter.
In a conference call with investors, John Joyce, IBM's chief financial officer, said that in the current quarter, its microelectronics business is likely to see a 15% to 20% decline as big customers in the networking and telecommunications businesses work off a $250 million inventory of semiconductors made by IBM.
He said that despite those problems, IBM could finish the year with overall revenue growth close to its goal of "high single digits" in constant currency. He added that in the computer industry, "We expect to be one of the very few to grow revenues and earnings per share in 2001."
Mr. Joyce also said that IBM's second-quarter net income was hurt by write-downs of equity investments of $106 million and losses on currency that weren't covered by hedging strategies.
In the past, IBM has hedged most of its overseas earnings, but this year the continued decline of the euro, the British pound and the yen overwhelmed the financial protections IBM had created.
"It moved so dramatically we couldn't keep spending money to hedge earnings," Mr. Joyce said in an interview. Based on current spot rates for foreign currencies, he said IBM would have to absorb an additional 14 cent-a-share loss on currency in the second half. He said the additional write-downs of equity are likely to be around five cents.
IBM's PC division, which also includes some printing systems, saw an 18% decline in revenue to $3.07 billion, but its pretax loss was only $8 million. Revenue in technology, which includes both the growing semiconductor business and the hard-disk-drive business which has been hurt by the PC slowdown, rose 4.8% to $2.12 billion.
Write to William M. Bulkeley at bill.bulkeley@wsj.com
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