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April 9, 1999
Better Results Are Expected
For Most Computer Makers
By ALEC KLEIN
Staff Reporter of THE WALL STREET JOURNAL
Leading U.S. computer makers should report mostly improved first-quarter results compared with last year, when turmoil in Asia and a retail-inventory glut of personal computers hurt sales and margins, analysts say.
Results, however, won't be as strong as once hoped, because an expected spending bonanza to fix the year-2000 bug didn't materialize.
The first quarter is usually slow for computer makers because spending by consumers shrinks after Christmas, and corporate orders slow after the usually strong fourth quarter.
----------------------------------------------------------------------Good News for Computer Companies? U.S. computer makers are expected to report improved quarterly results compared to last year:
Company Net Income Projection Reason
Compaq +320% Benefited from high-margin server business and easy comparison over weak year-ago period, but its PC demand is lower than expected in North America and Europe.
IBM +28% Growth is expected to be led by its thriving computer services unit, but demand is slackening for IBM mainframes.
Sun Microsystems +24% Solid results are expected, driven by its server business.
Hewlett-Packard +13% Consumer PC sales have been faring well, but the printer business has come under increasing pressure, and corporate PC sales continue to suffer against lower-priced competitors.
Sources: Industry analysts' projections; WSJ research
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Corporate PC demand grew about 10% in units and the consumer PC business continued to rise at about 15% to 20% in units. But prices dropped at about a 25% annual clip.
The first quarter's strength came in large measure from double-digit revenue growth in the market for servers, the powerful computers that link desktop PCs. What's more, the economic fallout in Asia appeared to bottom out, while Europe and the U.S. remained strong for computer makers.
IBM's Prospects
Now, however, "there's an overhang in the air," says analyst Laura Conigliaro of Goldman, Sachs & Co. She is concerned about what happens to purchases for the rest of the year if spending to fix the Y2K bug has come to a halt.
For International Business Machines Corp., Armonk, N.Y., Jay P. Stevens, a senior vice president at Buckingham Research Group, expects first-quarter revenue to rise nearly 7% to $18.8 billion. He estimates net income will reach $1.32 billion, or $1.40 a share, up 28% from $1.03 billion, or $1.06 a share, in the year-earlier period.
IBM's growth is led by its thriving computer-services unit, which grew almost 15% to $7.45 billion in the quarter, Ms. Conigliaro estimates. The service business now accounts for about 38% of the company's annual revenue.
IBM's PC business, which accounts for about 15% of revenue, is expected to grow in revenue at about a 15% rate, based on easy comparisons from a year earlier when sales faltered in a glutted market. Meanwhile, demand is slackening for IBM mainframes, which make up less than 5% of the company's revenue. Many customers bought those machines last year when the company introduced its G5 series.
Another IBM soft spot has been its midrange servers, which account for about 5% of revenue. Its AS/400 and RS/6000 servers haven't competed well against some of its more well-entrenched competitors, analysts say.
Sun and Hewlett
Competitor Sun Microsystems Inc. is considered partly responsible for IBM's weakness in the midrange server market. Ms. Conigliaro anticipates Sun, which just ended its fiscal third quarter, to report a sales increase of about 20% to $2.84 billion. Net income is expected to rise 24% to $287 million, or 70 cents a share, compared with $232 million, or 59 cents a share, in the year-ago period.
Sun's server business, which includes disk-drive storage hardware and accounts for more than half of company revenue, grew at about a 15% to 20% unit rate for the period, Mr. Stevens says.
Hewlett-Packard Co.'s results for its fiscal second quarter, ending later this month, haven't inspired as much optimism on Wall Street. Mr. Stevens expects H-P revenue to inch up about 2.1% to $12.29 billion. He believes net income will hit $777 million, or 74 cents a share, up 13% from $685 million, or 65 cents a share.
The Palo Alto, Calif., company has been trimming expenses through personnel cutbacks and outsourcing manufacturing, analysts say, and consumer PC sales have been faring well -- with about 20% growth in unit sales -- in the face of competitive pricing.
But H-P's huge printer business has come under increasing pressure, particularly from ink-jet rivals. Corporate PC sales, which took a hit in the previous quarter, continued to suffer against lower-priced machines from IBM and others, growing at less than 10% in units, analysts say. In addition, the company's HP 9000 server is in the midst of a major product-line transition.
Compaq Computer Corp., unlike H-P, benefited from its high-margin server business. James D. Poyner, an analyst with CIBC World Markets, expects Compaq's first-quarter revenue to rise about 72% to $9.8 billion from the anemic year-ago period, when PC retailers were working off an inventory glut. He believes net income will reach $566 million, or 33 cents a share, compared with last year's $16 million, or one cent a share.
The Houston computer company has warned of slower-than-expected PC demand in the quarter, particularly in North America and Europe.
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