IBM, the world's largest computer maker, warned on Monday that its sales and earnings for the first three months of this year would fall well below Wall Street's estimates. The announcement knocked more than 10 percent off IBM's stock price, and undermined hopes that the economy might soon get a lift from a revival in the computer business.
"This suggests that there is no information technology recovery," said Steven Milunovich, an analyst at Merrill Lynch & Co.
Spending on information technology by corporations has been weak for more than a year. Yet with its broad reach in selling computers, software and services, IBM had -- until now -- withstood the industry's slump far better than most of its rivals.
It was not only the size of the shortfall that caught Wall Street by surprise; so did its timing. Samuel J. Palmisano took over as chief executive from Louis V. Gerstner Jr. in March, so this is his first quarterly financial report as chief executive. Several analysts suggested that Palmisano might be "managing earnings" downward in his first quarter on the job, so that later comparisons will look more impressive.
A large, diverse company like IBM has some flexibility -- within accepted accounting rules -- in its financial reports, in matters like recognizing certain expenses or revenues in one quarter or another.
"There may be a little bit of that, in an innocent way," observed Laura Conigliaro, an analyst at Goldman Sachs & Co. "Palmisano didn't invent the numbers. But given the miss, why not take the hit and lower expectations?"
In its announcement, IBM said that it expects to report revenues of US$18.4 billion to US$18.6 billion in the first quarter, compared with the consensus estimate among analysts, according to Thomson Financial/First Call, of US$19.7 billion. IBM said that it expected profits for the quarter to be in the range of US$0.66 to US$0.70 a share. The Wall Street consensus had been US$0.85 a share. The earnings announcement from IBM, before the scheduled release on April 17, was the first such advance warning from the company in 11 years. The price of IBM shares fell US$9.84, to US$87.41 a share, in heavy trading.
The disappointing earnings announcement, some analysts say, also raises doubts about the comeback story at IBM under Gerstner, who took over in 1993 when the company was in a tailspin.
The issue, analysts say, is not whether the turnaround was both real and impressive, which, they agree, it was. Instead, the analysts say, the lingering issue about IBM is that a sizable portion of the company's drastically improved profit performance has come from cost-cutting, share repurchase programs and over-funding the company pension fund, which can be added to reported earnings. What has not improved nearly as much -- despite a striking shift in strategy to focus on services and software -- has been the growth in overall revenues.
"This brings to the surface the old question about IBM -- for all that Gerstner did, it is still not a growth company," said Ulric Weil, principal of Weil & Associates, a research firm in Washington. "Where is the growth going to come from?"
In a brief statement, John R. Joyce, IBM's chief financial officer, cited an "across-the-board weakness" in sales during the first quarter. "Many of our customers chose to reduce or defer capital spending decisions until they see a sustained improvement in their businesses," he said.
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