IBM 1st-quarter profit misses expectations
(Reuters)
Updated: 2005-04-15 10:34

No 1 computer company IBM, on Thursday surprised Wall Street with results that fell short of already low expectations, blaming pockets of global economic weakness and problems closing business deals.

Chief Financial Officer Mark Loughridge said the company had trouble closing short-term services contracts in the last two weeks of March and that, as a result, he could not predict whether IBM would live up to analysts' second-quarter targets.

IBM's shares fell nearly 4 percent to a 20-month low in after-hours trade following the unexpected report, issued four days ahead of schedule.

The news provided another shock for the US stock market, which closed at 2005 lows ahead of the IBM news, as concerns over economic strength and earnings growth sparked a broad sell-off. Stock futures dipped further after the IBM release, indicating a lower open for major stock indexes on Friday.

"Maybe this is a large canary in the coal mine saying, 'Maybe we're really having a slowdown,"' said Cummins Catherwood, a managing director at Walnut Asset Management in Philadelphia, with about US$750 million under management.

"It's going to be tough for stocks tomorrow," Pacific Crest Securities analyst Rich Petersen said. "People may just have to ratchet their expectations down for IT (information technology) hardware and software spending generally."

International Business Machines Corp, based in Armonk, New York, posted a profit from continuing operations of US$1.41 billion, or 85 cents a share, in the first quarter compared with US$1.36 billion, or 79 cents a share, a year earlier.

Analysts were looking for a profit, including options expense, of 90 cents a share, according to Reuters Estimates.

Revenues from continuing operations rose a tepid 3 percent to US$22.9 billion from US$22.2 billion a year ago, well below Wall Street analysts' expectations that ranged from US$23.2 billion to US$23.78 billion, according to Reuters Estimates.

Excluding the effect of the weaker US dollar, revenue rose just 1 percent year on year, the company said. IBM has suffered a steady slide in revenue growth in recent quarters amid weak organic growth and softening currency gains.

"After a strong start, we had difficulty closing transactions in the final weeks of the quarter," Chairman and Chief Executive Sam Palmisano said in a statement.

Loughridge, the CFO, said revenue fell 5 percent in the first quarter due to "soft economic conditions" in Germany, Italy, France and Japan, while revenue in the rest of the world rose 3 percent.

He called results "disappointing" from IBM's technical services and consulting business, which account for 51 percent of company revenues. The company lost ground in mainframes, personal computers and PC-based servers while gaining market share in its software business, he said.

Revenue from IBM Global Services, the technical and consulting services arm, grew 6 percent to US$11.7 billion during the first quarter, down from the low-double-digit percentage growth rate of recent quarters. IBM signed new services contracts worth US$10 billion, nearly US$1 billion short of what some analysts had been expecting.

Hardware revenue from continuing operations was essentially flat at US$6.7 billion, or down 2 percent after adjusting for currency effects. A year ago, in the midst of a strong product upgrade cycle, hardware revenue jumped 16 percent from 2003.

Revenue from mainframe computers fell 16 percent from a year earlier. It has been nearly two years since IBM last upgraded this highly profitable product line, which tends to drive additional customer sales. By contrast, mainframe revenue jumped 34 percent in the first quarter of 2004 over early 2003.

IBM's chief financial officer confirmed that the company had begun taking steps during the first quarter to restructure its work force in Europe in a bid to cut costs, and that it was preparing to take significant steps to overhaul its business.

"A couple of these actions may require some sizable restructuring activities," Loughridge said. He said Wall Street's estimates for the second half of this year were "reasonable" but declined to forecast IBM's second quarter. Analysts expect 6.5 percent revenue growth in the quarter.

IBM had scheduled its quarterly report for Monday, April 18, but elected to release the results early, IBM spokesman John Bukovinsky said.

Several analysts noted that IBM's decision last week to begin accounting for stock option costs in the first quarter -- months earlier than required by regulators -- had muddied investors' understanding of the results. Options cut reported profit by 14 cents a share, IBM said.

"Both the conference call last week about the options expensing and the timing of the earnings release this week are questionable," Sanford Bernstein analyst Toni Sacconaghi said.

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