THE FIRST QUARTER is usually the slowest of the year for IBM — and for technology spending generally — but this one was looks to be downright dismal.
On April 8, the company said it expected to earn between 66 and 70 cents a share - a far cry from the 85 cents consensus estimate of analysts surveyed by Thomson Financial First Call. The company earned 98 cents a share in the first quarter of 2001.
The company, citing a “very tough” business climate, blamed the profit stumble on a big shortfall in revenues, which are expected to be about $18.5 billion. That’s a little over $1 billion shy of estimates and $2.5 billion less than a year ago.
The company singled out its Technology Group, which makes computer chips and parts for other manufacturers, as being especially hard hit — with some $200 million in losses on a 35 percent revenue drop. But few other details were given.
The news hammered IBM’s price, which fell 10 percent in that day’s session. IBM is trading in the mid-80s, down from a 52-week high of $125.60 reached Jan. 4.
The main problem seems to be that IBM’s big corporate customers are waiting for stronger evidence of an economic rebound before they start spending more money on computer systems, according to IBM. A recent survey of top corporate technology managers by Salomon Smith Barney analyst Richard Gardner sees to bear that out: The survey found that hardware was low on the lists of spending priorities for those managers, “both today and following a recovery in budgets.”
The spending slowdown is also showing up in the numbers tracked by the U.S. Department of Commerce, which are expected to show a 25 percent drop in the first quarter from a year ago, according to Gardner.
But with investors questioning virtually every piece of financial data offered up by corporate America, IBM’s accounting for the revenue shortfall will be getting unusual scrutiny. They’ll also be listening carefully for the company’s earnings and revenue forecasts — the first since CEO Samuel Palmisano moved into the corner office vacated by now-Chairman Louis Gerstner. Some analysts have suggested that Palmisano may be starting his watch on with a more conservative outlook than his predecessor. (Wednesday’s conference call, as usual, will be conducted by chief financial officer Ed Joyce.)
BRIGHT SPOTS SEEN
Despite the first quarter slump, IBM continues to gain market share in key product lines. Some of that share is coming from customers who might otherwise have turned to IBM rivals Hewlett-Packard and Compaq, whose merger plan remains mired in limbo. Until a disputed shareholder ballot is certified, those two companies are barred from coordinating their sales efforts, creating widespread uncertainty and confusion for their customers.
IBM also continues to draw a large portion of its revenues from backlogged services contracts, which have helped offset the downturn in hardware spending. But investors will be looking closely at the growth of new services contracts for signs of whether IBM can keep its earnings growth on track. For the past five years, Big Blue’s has posted an average profit growth of 12.5 percent a year. Much of that has been fueled by the rapid growth of services contracts, which now accounts for about 40 percent of revenues.
Wall Street is looking for 2002 to be a down year, but analysts still expect IBM’s profits to begin picking up again in the second half of this year — and take off sharply in 2003. After falling 4.5 percent percent this year to $4.16 a share, those earnings forecasts see profits jumping 19.5 percent in 2003 — to $4.97 a share, according to First Call. Revenues are expected to slip to $83.0 billion this year from $85.9 billion in 2001, rising to $89.5 billion for all of 2003.
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