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IBM beats 2Q estimates
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July 20, 1998: 6:54 p.m. ET
Company earns $1.50 a share; services revenue up, hardware dips
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NEW YORK (CNNfn) - International Business Machines Corp. Monday reported flat net income and lower revenues for the second quarter, reflecting the slowdown in Asia and continued weakness in the personal computer business.
Armonk, N.Y.-based IBM earned $1.45 billion, or $1.50 a diluted share, compared to $1.45 billion, or $1.43 a diluted share, a year ago. The computer giant's revenues dropped 0.3 percent to $18.82 billion from $18.87 billion a year ago. However, on a constant currency basis, which excludes the effects of the strong U.S. dollar, IBM's revenues actually rose 4 percent in the period.
IBM's results narrowly topped analysts' expectations of $1.49 a share.
IBM (IBM) shares moved to 122-5/8 in after-hours trading, up from their close of 121-3/4.
IBM Chairman and Chief Executive Officer Louis Gerstner Jr. characterized the quarter as a mixed bag.
"Our hardware revenues were down primarily because of the weakness in PCs. Additionally, our System/390 server business slowed in the quarter because of a major product transition underway," he said.
"On the positive side, our services revenue grew by nearly $1 billion and this business made a major contribution to the company's earnings. Our software revenues showed good growth and the software gross margin improved for the fifth consecutive quarter," Gerstner said.
Gary Helmig, technology analyst at SoundView Financial Group, is among those forecasting an improvement in the rest of the year.
"Their revenues were a little bit light and earnings were below my expectations, although they will have a strong second half," he said.
One of the key components of the turnaround, Helmig believes, will be a strong performance from a new line of System/390 servers which will ship in August.
"Some transition issues, particularly in their PC unit, are behind them. Mainframes look like they are getting off to a strong start," Helmig said.
Revenue from IBM's services unit, which helps large companies set up and run their computer systems and networks, grew 22 percent, or 27 percent on a constant currency basis, to $5.6 billion. That marked the third consecutive quarter services exceeded $5 billion. Gross margins in services improved 1.3 percent.
Total hardware sales dropped 13 percent to $7.5 billion, or 9 percent on a constant currency basis. Some of the factors include product transitions and price reductions that hurt revenues in the System/390 line. One bright spot was storage revenues, which increased because of higher shipments of disk drives to computer makers.
Software revenues climbed 5 percent, or 9 percent on a constant currency basis, to $3.2 billion. Strong performers included database software and systems management products produced by IBM's Tivoli unit.
Maintenance revenues fell 9 percent, or 5 percent on a constant currency basis, to $1.5 billion.
Gerstner said IBM has made progress in reducing PC inventory, an area that has been a problem for the company. He also said demand for the new System/390 server line looks very strong.
"Our second quarter and first half results clearly indicate, perhaps more so than at any other time in recent years, the value and strength of IBM's portfolio of businesses.
"We absorbed three major hits that affected the industry: intense price competition and excess inventory in the PC channel, continued severe price erosion in [memory] chips and the impact of the Asian crisis," he said.
Besides a strong showing by its services unit, Gerstner said IBM was helped by growth in software revenues.
As with many technology companies, Asia's economic problems continue to weigh on IBM.
Breaking down performance by geography, North American revenues increased 5 percent to $9 billion; Europe, the Middle East and Africa grew 2 percent to $5.8 billion; Asia Pacific dropped 13 percent to $3.3 billion and Latin America dropped 8 percent to $782 million.
Looking ahead, Gerstner expressed confidence that the company's growth will continue and that performance of problem areas will improve.
"We feel very good about the momentum of our growth businesses and we believe that some of the problem areas will begin to show improvement over the course of the year. At the same time, we remain cautious about Asia and the [memory chip] outlook," he said.
-- by staff writer Cyrus Afzali
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