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IBM hits lowered profit target
Company earns 68 cents per share after warning; CFO comfortable with Street's 2002 estimate
April 17, 2002: 6:29 PM EDT
By Richard Richtmyer, CNN/Money Staff Writer

NEW YORK (CNN/Money) - IBM on Wednesday logged a first-quarter profit that fell sharply from the same quarter a year ago but was in line with recently-reduced estimates.

And executives of IBM, the world's largest supplier of computer hardware and information technology services, said they should be able to meet Wall Street's revenue and earnings expectations for the remainder of the year.

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"We believe that the recent changes to the 2002 revenue and [earnings per share] estimates for IBM better reflect the current realities of the marketplace," John Joyce, IBM's chief financial officer, said during a teleconference Wednesday evening.

"Based on where we stand today, we expect to make these estimates," Joyce said.

At last count, analysts polled by earnings tracker First Call generally were expecting IBM (IBM: Research, Estimates) to report a profit of $4.16 per share on about $83 billion in revenue this year.

Most analysts reined in their estimates for IBM this year after the company warned of a shortfall in its first quarter.

Early last week, IBM told investors that its first-quarter results were not as strong as the company had hoped, saying they would report a profit ranging between 66 cents and 70 cents per share on sales between $18.4 billion and $18.6 billion.

Prior to that, 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.

After Wednesday's close, IBM said its first quarter profit was $1.2 billion, or 68 cents per share. That's down 29 percent from $1.7 billion, or 98 cents per share during the same quarter last year.

At $18.6 billion, IBM's first-quarter revenue was at the high end of its lowered estimate but down 11.4 percent from the same quarter last year.

Some company watchers had been expecting IBM to lower the bar moving forward under its new management. Samuel J. Palmisano took the helm of IBM as its CEO on March 1, succeeding Louis V. Gerstner, who had served as its top executive since 1993.

IBM's first quarter gross margin, the percentage of sales remaining after subtracting product costs, was 34.7 percent, down from 36.1 percent during the year-ago quarter.

Joyce said weakness in computer hardware was wholly responsible for the lower margin, while gross margins in the company's services and software businesses showed modest improvements from the same period a year earlier.

Revenue from IBM's computer hardware business in the first quarter also showed the most substantial decline, falling 25.1 percent from a year ago to $6.4 billion.

IBM's services revenue, which represented more than 44 percent of the company's total revenue for the quarter, fell 2.9 percent to $8.2 billion. Meanwhile, revenue from IBM's software business in the first quarter fell a fraction of a percent to $2.9 billion.

Sounding what has become a familiar refrain among technology companies in recent weeks, Joyce attributed the first-quarter's shortfall to a continued weakness in IT spending by large corporations, many of which are delaying projects until they see sustained improvements in their business.

Shares of IBM have been pressured recently not only because of the weakness in its first quarter but also because of increased scrutiny of its accounting practices.

Corporate accounting has become a hot-button issue since the collapse of energy trader Enron amid an accounting scandal, and there has been a proliferation of media reports questioning IBM's financial reporting practices.

The spotlight began to shine on IBM right after it reported its fourth quarter results in February. At issue was the was the way it accounted for a $300 million gain from the sale of its optical transceiver business, which it sold to JDS Uniphase.

IBM treated the gain as an offset to its operating expenses, rather than recording it as "other income." The company said it views such transactions as an example of how it recovers investments in intellectual property, similar to licensing royalty payment.

Joyce vigorously defended IBM's accounting practices during Wednesday's call, saying the company has been "astounded" by some of the reports that have come out over the last few months.

"Let me just say once and again that we are proud of our accounting and disclosure practices," Joyce said. "We hope this issue is behind us and we'd like to move on."

He said it was "absurd" to characterize intellectual property income as non-operational, calling such revenue "absolutely fundamental to IBM."  Top of page