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.
PHOTO: NY TIMES
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.
In his statement, Joyce cited a particular problem in the company's technology group, which produces and sells semiconductors, disk drives and other equipment to other computer makers, telecommunications companies and cell-phone manufacturers. Revenues in the technology group were down about 35 percent in the quarter from the year-earlier, and the group expects to lose approximately US$200 million, or 8 cents a share.
When high-technology spending surged in the late 1990s, the technology group was a strong business for IBM, as shipments had trouble keeping up with demand. But with demand down, IBM still has high fixed costs because it owns and runs manufacturing plants around the world.
IBM, analysts say, may well consider layoffs in the technology group or shrinking its payroll through attrition. And it could slow or abandon a factory project or two.
Still, the weakness in IBM's business of supplying technology parts to other companies was not a surprise. And the cyclical problem could correct itself fairly quickly if corporate spending in information technology picks up in the second half of the year, as most analysts anticipate.
But IBM does face some longer-term problems as well, according to Tom Bittman, an analyst at Gartner. The company's PC business, Bittman said, is declining faster than expected and its sales of mainframe computers continue to erode. Despite its shift to software and services in recent years, IBM remains dependent on hardware sales.
In addition, the growth in its services business, especially consulting, has slowed to about 7 percent, down from 15 percent or more a few years ago. "It's just fine, but it's not growing at the same rate," Bittman said.
For all its focus on the specifics of its business, the IBM announcement is viewed mainly as a sign of the buying halt by large corporations. A number of technology companies -- PeopleSoft, Oracle and others -- have recently cautioned that corporate customers remain on the sidelines. Last month, Richard Sherlund of Goldman Sachs, a leading software analyst, said he expected Microsoft to soon reduce its financial forecast for the year. Microsoft will report its quarterly results next week, on April 18.
"IBM is almost an economy unto itself," said John Gantz, the director of research for the International Data Corp. "If it is hurting, it is because the whole information-technology sector is hurting. But it is a fundamentally sound company."
There are some tentative signs that investment may be starting to pick up a bit. CIO Magazine conducts monthly polls of corporate buying plans among more than 250 chief information officers at companies large and small. Purchasing plans for the next 12 months were sharply up in March, though the most optimistic projections came from smaller companies.
But 83 percent of big companies said they had long-delayed information-technology projects that had to get done before long.
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