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IBM reports 4Q profit
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January 20, 1998: 8:17 p.m. ET
Despite record numbers for quarter, year; rough 1998 seen ahead
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NEW YORK (CNNfn) - IBM Corp. reported higher fourth quarter profits Tuesday, but a warning about weaker first quarter profits pushed shares of the computer giant sharply lower in after-hours trade.
The Armonk, N.Y.-based company earned $2.1 billion in the three months ended in December, up from $2.0 billion a year ago. Revenues rose 3.0 percent to a record $23.7 billion.
On a per share basis, IBM earned $2.16 per primary share in the fourth quarter, up from $1.97 a year ago. However, on a diluted share basis, which reflects the per share profit after conversion of convertible securities, IBM earned $2.11 a share in the latest quarter, up from $1.93 a year ago.
According to First Call, analysts had expected "Big Blue" to earn $2.15 a share in the fourth quarter.
Big Blue shares tumble after-hours
Prior to the release of the report, shares of IBM (IBM) gained 2-11/16 to close at 107-11/16. However, in after-hours trade, IBM fell to 102.
George Elling, technology analyst at Lehman Brothers, attributed part of the decline to a warning from IBM that earnings in the first quarter could be anywhere from 10 to 15 cents off 1997 levels due to a number of unforeseen expenditures.(235K WAV) or (235K AIFF)
However, John Jones, computer analyst at Salomon Smith Barney, said he believes that once Wall Street digests the news, the nervousness that hit following the announcement will subside.
"The business picture in our expectations is going to look much brighter than it does now," he said. "Their software business is accelerating, the consulting business continues to grow above 20 percent [a year], Europe looks strong and North America grew 10 percent.
"This is not a company whose expectations are any different than they were three to six months ago. I expect for [1998], the numbers will come in with expectations," he said.
First Call analysts are predicting net income of $7 a share for 1998.
Asia, Olympics to cut into first qtr results
In a conference call with reporters and analysts, Larry Ricciardi, IBM's chief financial offer, attributed the first quarter downturn to costs related to IBM's acquisition of Software Artistry Inc., a manufacturer of computer network management products, as well as pressure from currency exchange rates. Also blamed were turmoil in Southeast Asia and marketing expenses related to IBM's participation in the 1998 Winter Olympics.
"The first quarter is marked by an unusual confluence of items," Ricciardi said.
"While it remains our policy not to give out specific guidance... our first quarter [earnings per share] might be significantly impacted, taking it as much as 10 or 15 cents below last year's first quarter," he said.
Jones said while that looks bad on the surface, it's really only due to the fact that IBM's taking the Olympics and acquisitions expenses as one-time charges rather than spreading them over time.
"Most companies would write that off as a one-time event," he said. The charges "are 10 to 12 cents of the disappointment. They're also investing heavily in the Olympics which is another 3 to 5 cents. Those are non-recurring events."
Ricciardi said the firming of the dollar was responsible for shaving 5 percent off the fourth-quarter's revenue and trimmed the company's earnings per share by 18 cents.
The company also said it wrote off a number of receivables from Asian customers in the quarter, estimated to be worth between $50 million and $75 million.
Services unit was a bright spot
The bright spot was clearly the services unit, which now accounts for about 25 percent of the company's revenues. Business in the unit grew 18 percent to $5.9 billion. The company said the business backlog in the unit stood at more than $40 billion.
Louis Gerstner, IBM's chairman and chief executive officer, said he was proud of the company's performance, particularly since its business was negatively impacted by a stronger dollar, weakness in Asian markets and pricing pressures.
"Our results are especially satisfying because they were achieved despite a number of very difficult factors... We remain comfortable with our strategies, with the fundamental strength of our business and with our long-term business and financial model," he said.
For the entire year, IBM reported a profit of $6.1 billion, or $6.18 per common share, compared with net earnings of $5.9 billion, or $5.53 per common share a year ago. The 1996 figure excluded a charge associated with research and development related to acquisitions in the first quarter of 1996. Including the charge, 1996 net earnings were $5.4 billion, or $5.12 per common share. 
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