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Y2K bruises IBM 3Q
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October 20, 1999: 6:59 p.m. ET
Big Blue meets estimates, but Y2K concerns dampen performance, outlook
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NEW YORK (CNNfn) - International Business Machines Corp. reported higher third-quarter profits Wednesday, but the results were overshadowed by a warning that fourth-quarter and fiscal 2000 first-quarter results will fall well below analysts' estimates.
News of the profit shortfall, which IBM attributed to Year-2000 concerns, sent shares of Big Blue tumbling more than 10 points in after-hours trade and likely will send the markets reeling when trading begins Thursday.
"It's a disaster," said Dan Niles, technology analyst at BancBoston Robertson Stephens. "They told us three months ago that Y2K isn't going to have any effect on them at all. They miss this quarter, now they're saying the next quarter is going to be even worse and that the first quarter will have even more losses."
IBM (IBM) earned $1.8 billion, or 93 cents a share, in the quarter ended Sept. 30. Excluding gains amounting to 3 cents a share, the firm logged a profit of 90 cents a share, matching analysts' estimates, according to First Call. Revenue rose 5 percent to $21.1 billion.
The company outpaced its year-ago performance, when it reported a profit of $1.5 billion, or 78 cents a share, on $20.1 billion in revenue.
Y2K to cut 4Q earnings
IBM attributed much of its growth to strong performances in its services and software businesses. However, Louis Gerstner, IBM's chairman and chief executive officer, acknowledged that IBM's performance -- particularly in its computer server business -- was hampered by Y2K-related concerns.
Many large corporations are hesitant to commit to large-scale technology purchases until they are confident that their Y2K-remediation programs are complete.
"Looking forward, we believe we will continue to feel the effects of the Y2K slowdown in the fourth quarter and into early next year," Gerstner said. "Next year has the potential to be a very good year for IBM, once we get past any lingering Y2K effects."
Douglas Maine, IBM chief financial officer, advised analysts that the company's fourth-quarter earnings would fall well short of forecasts due to lingering Y2K effects. Analysts expected the firm to earn $1.33 a share during the quarter. Maine said IBM profits should come in between $1.04 and $1.09 a share.
He also noted IBM's first-quarter earnings will be well below analysts' estimates of 90 cents a share due to Y2K concerns. Maine said IBM's first-quarter estimates would be "flat or slightly below" the 78 cents a share it reported in last year's first quarter.
Maine added, however, that the company's fiscal-year 2000 performance remains on track as customers resume normal buying patterns later in the year. He advised analysts to maintain their 2000 earnings-per-share estimates.
Y2K issues largely affected IBM's high-margin computer server business. Sales of the company's AS/400 and System/390 models both declined on a year-over-year basis.
BancBoston's Dan Niles, who previously downgraded his rating on IBM's stock to "long-term attractive," said the company should not have been taken by surprise by a Y2K-related slowdown.
"Our stance has been in big enterprise applications, it was obvious that people were buying ahead to get their systems ready for Y2K," Niles said. "The mainframe business is a dying business, and our feeling was IBM would see it in the third and fourth quarters because the growth patterns weren't normal."
Shares of IBM, a Dow component, closed on the New York Stock Exchange at 112-3/4. However, the stock fell to 107 in composite trading, and then tumbled further to 102-1/4 in after-hours trade.
PC business still suffering
Maine acknowledged that "profitability remains an issue" at IBM's personal systems unit, which is largely responsible for PCs.
Although personal systems revenue climbed 11.2 percent to $3.7 billion, the unit lost $69 million in the quarter.
Maine added that a shortage of flat-panel displays constrained sales of IBM's ThinkPad notebook computers.
IBM said Tuesday it would cease retail sales of its Aptiva consumer desktop PCs to focus on direct Internet sales, emulating the model favored by such rivals as Dell Computer Corp. (DELL) and Gateway Inc. (GTW).
The company also recently said it would cut as many as 1,000 jobs at its personal systems division.
IBM has been striving to focus more on its faster-growing businesses, such as services and e-business solutions. The company's Global Services unit logged a 12.1-percent gain in revenue.
Rocky road for techs
IBM's warning is likely to continue the roller-coaster ride technology stocks have suffered this week. An earnings warning earlier this week from Dell sent tech stocks into a tailspin, while Microsoft Corp. 's (MSFT) strong first-quarter earnings and outlook inspired a broad-based rally Wednesday.
For the nine-month period ended Sept. 30, IBM recorded a profit of $5.6 billion, or $2.99 a share, on $63.4 billion in revenue, compared to year-ago profits of $4 billion, or $2.05 a share, on $56.5 billion in revenue.
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