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IBM tops 4Q estimates
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January 19, 2000: 8:04 p.m. ET
Big Blue meets lowered expectations as hardware sales slide
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - International Business Machines Corp. reported an 11 percent drop in fourth-quarter profits Wednesday as a slowdown in corporate buying took a chunk out of Big Blue's bottom line.
The world's largest maker of computers blamed the shortfall on delays in hardware purchases ahead of the millennium date-change, especially among insurance companies and banks. However, the company said it expects to rebound now that the Y2K changeover is complete.
"The Y2K lockdown was very real," John Joyce, IBM's chief financial officer, told analysts in a conference call Wednesday. "It certainly impacted our largest customers."
During the most recent quarter, IBM earned $2.1 billion, or $1.12 a diluted share, down from $2.3 billion, or $1.24 a share during the same period a year earlier. Fourth-quarter revenue came in at $24.2 billion, down 4 percent.
Click here to read IBM's earnings report
Analysts polled by earnings tracker First Call had expected Big Blue to post a fourth-quarter profit of $1.06 per share. That figure was lowered in October, after IBM warned of the potential Y2K-induced shortfall.
Net income for all of 1999 was $7.7 billion, or $4.12 per diluted share, compared with $6.3 billion, or $3.29 per diluted share in 1998. Revenue for the year rose 7 percent to $87.5 billion, IBM said. The full-year results reflect a one-time gain of $750 million, or 40 cents per diluted share, resulting mostly from the company's sale of its Global Network to AT&T (T) Corp. IBM's Global Network had been created as an internal phone system, but was expanded to transmit corporate data for roughly 30,000 customer facilities in 900 cities across the world.
A brighter outlook for the rest of the year
In the near term, Joyce said that Y2K issues are still weighing on the company's business, but he expects 2000 to be a strong year for the company.
"We expect the lockdown to be lifted at different times from different customers, As a result, we're still feeling the lingering effects of Y2K in the first quarter," he said.
Joyce warned analysts that that IBM's first-quarter profits would match or fall slightly below the 78 cents per share the company reported during the first quarter of 1999.
He added, however, that 2000 "has the potential to be a very good year for IBM. Our objectives for 2000 are in line with our long-term objectives and the Street's current expectations."
First Call's consensus earnings-per-share estimate for IBM in 2000 is $4.30.
IBM -- which under chairman and chief executive Louis V. Gerstner Jr. has been transforming itself from its traditional role as a computer-equipment maker to a provider of technology, services and software -- posted an 11 percent decrease in hardware revenue during the quarter.
At the same time, IBM's Global Services division posted a 7 percent increase in revenue, excluding maintenance contracts. Including maintenance, that division's revenue grew 2 percent to $8.7 billion, the company said.
The company signed $10.3 billion in services deals in the fourth quarter and ended 1999 with a services backlog of $60 billion, according to Joyce.
"That makes them the biggest services provider on the planet," said Sam Albert, president of Sam Albert Associates, an independent management consultant firm in Scarsdale, NY. "Software and services were no means deficient, as many people thought they would be."
For all of 1999, hardware sales increased 5 percent to $37 billion, while services revenue was up 11 percent at $32.2 billion.
"Services now represent nearly 50 percent of IBM's revenue," Joyce said.
Shares of IBM closed up 3-3/4 at 119-1/2 in New York Stock Exchange trade Wednesday before the quarterly results were announced. The stock was up 1-1/2 at 121 on MarketXT shortly before that electronic communications network company closed at 8 p.m. Wednesday night.
But Ulric Weil, a technology analyst at Friedman, Billings, Ramsey & Co., said investors might not be so thrilled with IBM's results, which could send the stock lower on Thursday.
"I would say it's going to sell off," Weil said. "I don't see any driving force to push it up significantly as people think about what it all means."
Most of the upside came from cost-cutting, and the company's revenue for the quarter came in where it was expected to, Weil said.
He noted that Microsoft (MSFT) and Motorola (MOT) both were down sharply after posting similar results and issuing similar guidance.
"The market is in a fairly ugly mood for that type of thing," he said. "The Street does not give a lot of kudos for tight expense management, because that may not be repeatable. You can't forever cut head count to make a given number."
But Albert said he expects IBM, which reduced a little less than 10 percent of its total work force in 1999, to continue to reduce head count as it moves ahead into 2000.
"The cost-cutting has been a natural evolution, and that probably was the reason that the earnings were better."
Although it was less than 10 percent of the work force, Albert said that there was "considerable downsizing" at IBM in 1999, which he expects to continue into 2000.
"I think you will see IBM on an ongoing people reduction program, which is the quickest way to add to the bottom line." 
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