IBM edges estimates, affirms target

October 16, 2001: 5:20 p.m. ET

Tech bellwether beats earnings estimate by a penny on weaker revenue.

NEW YORK (CNNmoney) - IBM on Tuesday logged a third-quarter profit that beat analysts' estimates on slightly weaker-than expected revenue. At the same time, executives said that they expect to meet the Street's current earnings estimates for the fourth quarter.

"Based on everything we know today, we believe the current earnings-per-share consensus for the fourth quarter is reasonable," John Joyce, IBM's chief financial officer, told analysts during a teleconference Tuesday evening.

After the closing bell, IBM, the world's largest supplier of computer hardware and information technology (IT) services, said it earned 90 cents per share during the third quarter. That compares with $1.08 per share during the same quarter last year and is a penny better than the 89 cents per share Wall Street had expected, according to a survey conducted by First Call.

At $20.4 billion, IBM's (IBM: Research, Estimates) third-quarter revenue fell 6.4 percent from $21.8 million a year ago. By First Call's count, analysts had expected IBM's top line to be $20.9 billion.

Because of its broad mix of products and services as well as its extensive global reach, IBM has weathered the downturn in technology spending much better than some of its counterparts in the IT industry, and has developed a reputation for being able to meet Wall Street's financial expectations even when many other technology outfits were falling short.

Some analysts on Tuesday sounded cautious words about IBM in light of the recent IT business environment, as well as anticipated weakness in the coming months.

Citing weakness in PCs, hard-disk drives and microelectronics, Prudential Securities on Tuesday characterized the Street's consensus revenue estimate as "nearly $1 billion overly optimistic." The firm also said momentum in IBM's services business, which now represents an increasingly large percentage of overall sales, slowed at the end of the quarter, exacerbating potential pressures in the fourth quarter.

Merrill Lynch also weighed in with cautious comments about IBM's fourth quarter outlook Tuesday, lowering its estimates based on similar concerns.

"If demand continues to slow, IBM's 'annuity-like' business should slow further," Merrill told its clients Tuesday. "In our view, IBM isn't immune; it's just more insulated."

During Tuesday's teleconference, Joyce said IBM will benefit from the steady flow of revenue and profit from 'annuity-like' business including services, host-based software, maintenance and financing, which will help offset weakness in other areas.

The current consensus earnings estimate for IBM that Joyce said is reasonable is $1.34.

IBM highlighted the performance of its services business, which represents an increasingly percentage of overall sales and, at $8.7 billion, rose 5.4 percent from the same quarter last year.

The company also highlighted its software business, where revenue totaled $3.2 billion, up 9.7 percent from a year ago.

At the same time, IBM reported weakness in its PC and hard-disk drive businesses, which Joyce said was exacerbated by the Sept. 11 terrorist attacks on the United States.

Joyce said the attacks hurt the company's hardware sales - which totaled $7.5 billion, down nearly 21 percent from last year - as well as sales of distributed software because much of that business is closed at the end of the month.

He said order deferrals were concentrated mostly among customers in the financial services and insurance industries and affected storage systems and Intel-based servers the most.

The company said third-quarter revenue from global financing fell 4 percent to $822 million. Revenue from enterprise investments and other sources totaled $244 million, down more than 24 percent from the same quarter last year.