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IBM hits profit target
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July 18, 2001: 7:14 p.m. ET
Big Blue makes earnings mark, says Microelectronics is a wild card
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - IBM on Wednesday logged a second-quarter profit that matched Wall Street's expectations, on sales that fell modestly from the same quarter a year earlier and were below expectations.
And executives of IBM suggested that weakness in some of the company's business lines, continuing strength of the dollar against foreign currencies, and investment losses could weigh on results in the second half of the year, although they did not provide specific earnings or revenue targets.
After the close of trading Wednesday, Big Blue said its second-quarter net income was $2 billion, or $1.15 per share, compared with $1.9 billion, or $1.06 per share, in the same quarter last year. That was in line with the consensus estimate of analysts polled by earnings tracker First Call.
However, at $21.6 billion, IBM's second-quarter revenue was down slightly from the $21.7 billion it reported during the second quarter of 2000 and was below the $22.5 billion in revenue analysts generally had expected.
IBM (IBM: Research, Estimates) is the world's largest supplier of computer hardware and a leading software supplier. It also has the world's largest technology services business, which accounts for roughly 35 percent of its total sales.
Because of its broad mix of products and services as well as its extensive global reach, IBM has weathered the downturn in technology spending much better than some of its counterparts in the information technology industry. However, some on Wall Street have been raising red flags on Big Blue, warning that it may start to feel the effects in the remainder of this year.
On Tuesday, Merrill Lynch analyst Thomas Kraemer lowered second-quarter revenue projections on IBM and cut his third-quarter profit forecast to $1.13 per share from $1.17 per share. He pointed to pessimistic comments from computer services company Unisys – which on Monday reported that it is seeing signs of stabilization in the United States but said international markets have deteriorated with weakening order trends in Europe – as evidence of looming trouble for IBM.
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John Joyce, IBM | |
A.G. Edwards analyst Shebly Seyrafi told CNNfn on Tuesday he was expecting IBM's second-quarter profit to be in line with the Street's estimates but also said he sees weakness internationally, which could weigh on IBM's results in the second half of the year.
During a teleconference with analysts Wednesday evening, John Joyce, IBM's chief financial officer, confirmed some of those fears, telling them that the company's bottom line could indeed be hurt by weakness in certain product areas compounded by the strength of the U.S. dollar against foreign currencies as well as losses in its investment portfolio.
Assuming the continued strength of the dollar, Joyce said the year-over-year hit to earnings in the second half will be 14 cents. "In other words, at current spot rates, we would have to absorb this hit to our earnings above and beyond our hedge position," he said.
He said he expects IBM's equity write-offs in the second half to be between $100 million and $125 million, which would trim about 5 cents in earnings per share.
In the first half, because of very strong results across most of its business, IBM was able to absorb the impact of such non-operating items and still meet its financial objectives, Joyce said.
"Our ability to do this in the second half will, for the most part, be a function of what happens to our Microelectronics business," Joyce said.
Through its Microelectronics division, IBM sells a range of semiconductor products for a range of applications, including telecommunications and data-networking equipment, and industry that has been especially hard hit by the economic slowdown.
"If demand in Microelectronics picks up in the third quarter and continues to expand into the fourth quarter, we would be encouraged," Joyce said, noting that he currently expects a 15 percent decline in revenue in the third and fourth quarters from the second.
"On the other hand, if our major Microelectronics customers, those who provide network infrastructure, pervasive devices and other hardware products do not start growing their businesses in the third quarter, then our ability to cover these non-operating items could be problematic, and in fact could even cost us a few cents more than these non operational items," he said.
He did not provide a specific earnings per share target for the third quarter of the remainder of the year. The most recent consensus estimate of analysts polled by First Call is for third-quarter earnings of $1.13 on $22.7 billion, and full-year earnings of $4.82 on sales of $92.5 billion.
At the same time, Joyce said IBM remains in a relatively strong position to meet its 2001 revenue-growth target.
"In this environment, we still expect to grow revenues for the full year at or close to our model, which is high single digits in constant currency," he said.
Services outsell hardware
During the teleconference, Joyce highlighted several of IBM's other businesses that performed more strongly than Microelectronics during the second quarter.
He pointed to IBM's services business, where sales, at $8.7 billion, were up 6.8 percent from $8.2 billion in last year's second quarter. Under CEO Louis V. Gerstner, who took the helm in 1993, IBM has sharpened its focus on services. During the second quarter, IBM's services revenue slightly exceeded revenue from IBM hardware products.
During the quarter, Joyce said IBM signed $16 billion in services contracts, and finished the quarter with a services contract backlog of about $95 billion.
"On a year-to-date basis, Global Services has just overtaken hardware," Joyce said. "IBM is truly a services-led company."
Computer hardware sales fell 5 percent to $8.7 billion, with weakness in areas such as personal computers and hard disk drives offset by strength in mainframe computers and data-storage products, Joyce said.
Sales of mainframe-class systems grew in excess of 40 percent, as measured in MIPS, or Millions of Instructions Per Second, Joyce said. At the same time, he said sales of IBM Unix servers and IBM's iSeries mid-market servers declined, while revenue increased strongly for high-end enterprise pSeries servers.
IBM's software revenue fell 5 percent to $3 billion compared with the second quarter of 2000. But Joyce highlighted IBM's key distributed middleware products, WebSphere and DB2, which he said grew strongly.
Sales of data-storage management software from IBM subsidiary Tivoli Systems declined as a result of continuing transitions in this unit's product line, Joyce said, noting that the decline adversely affected IBM software revenue by roughly five points of growth.
IBM Global Financing revenue increased 3 percent in the second quarter to $845 million, while revenue from the Enterprise Investments/Other area, which includes custom hardware and software products for specialized customer uses, declined 7 percent to $293 million, Joyce said.
The company's second-quarter gross profit margin, the percentage of sales remaining after subtracting product costs, was 37.3 percent, up from 36.3 percent in the same period last year.
After closing at $104.28, down $4.25 or nearly 4 percent, on the New York Stock Exchange Wednesday, shares of IBM slid to $100 in extended hours trade. 
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IBM in $100M deal with Shell - July 6, 2001
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IBM, Lucent ink services pact - June 12, 2001
IBM extends storage line - June 12, 2001
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Gerstner talks technology - May 17, 2001
IBM's Gerstner bullish on services - May 10, 2001
IBM meets Street, affirms targets - Apr. 18, 2001
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