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IBM sees 1Q shortfall
Tech bellwether's warning is the latest signal that IT spending levels remain depressed.
April 8, 2002: 3:04 PM EDT

NEW YORK (CNN/Money) - IBM Monday eliminated any doubt that the slowdown in technology spending carried over into the first quarter after the world's largest computer maker warned that its earnings and revenue will be sharply below prior forecasts.

Before the stock markets opened, IBM said it expects to log first-quarter earnings ranging from 66 to 70 cents a share on sales of $18.4 billion to $18.6 billion. At last count, the consensus estimate of analysts polled by earnings tracker First Call was for IBM to earn 85 cents a share on revenue of $19.7 billion in the quarter.

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During the same quarter a year earlier, IBM reported a profit of 98 cents per share on $21 billion in revenue.

Rumors that IBM would warn of a shortfall began circulating in the market last Friday, so the announcement was not altogether unexpected. Even so, IBM (IBM: down $9.87 to $87.38, Research, Estimates) shares tumbled on the New York Stock Exchange Monday, helping pull the broader market lower. Most other tech stocks fell in sympathy.

IBM, the world's largest maker of computer hardware and software and supplier of information technology (IT) services, also operates a large and growing merchant business through which it sells semiconductors and other components to makers of computers and other electronics.

That unit, which the company calls its Technology Group, was especially hard hit during the quarter, said John Joyce, IBM's chief financial officer. He said that unit lost about $200 million, or 8 cents per share, in the first quarter, amid a revenue decline of 35 percent.

In general, Joyce blamed the warning on a difficult business environment which was further pressured by the typically weaker first-quarter for technology companies.

"The first quarter traditionally is the weakest period of the year for technology purchases, and many of our customers chose to reduce or defer capital spending decisions until they see a sustained improvement in their businesses," Joyce said in a statement.

IBM's announcement was the latest signal that IT spending, especially among large corporations, remains weak in spite of apparent signs of improvement in the U.S. economy.

Goldman Sachs last week cut its earnings estimates on a range of enterprise hardware and software suppliers, including IBM, advising its clients that while there appeared to be a general pickup in its hardware business at the end of the quarter, it was not enough for IBM to make its numbers.

At least 20 enterprise software makers last week also warned that they had missed their financial targets for the quarter, most of them blaming the shortfall on unexpected weakness in information technology spending among large corporations.

For the second quarter, analysts most recent had expected IBM to log a profit of $1.08 per share on about $20 billion in revenue, according to the First Call survey. For the full year, estimates are for a profit of $4.76 per share and $88.2 billion in revenue.

But Merrill Lynch on Monday suggested that those numbers may come down under IBM's new management.

Samuel J. Palmisano, formerly president and chief operating officer, took the helm of IBM as its CEO on March 1, succeeding Louis V. Gerstner, who had served as IBM's top executive since 1993.

In a note to clients on Monday, Merrill said it is not clear whether IBM's announcement indicates that its business is getting that much worse or whether it "reflects the inclinations of the new CEO."

"We believe that management may be inclined to set the earnings expectations lower going forward," Merrill said.

IBM is set to report its first-quarter results and update its financial targets for the second quarter and beyond on April 17.  Top of page