News > Technology
IBM profit falls but tops forecasts
Company says 2Q profit, excluding charges, was 84 cents per share; affirms Street's 2002 estimates.
July 17, 2002: 6:56 PM EDT

NEW YORK (CNN/Money) - IBM Wednesday logged a sharply lower second-quarter profit amid a continued slump in corporate information technology (IT) spending, but the results still exceeded recently reduced forecasts.

And executives of the world's largest supplier of computer hardware and IT services said they are likely to hit Wall Street's most recent consensus earnings estimate of roughly $4 per share for 2002, promising that recent restructuring moves will pay off in the second half of the year.

"Our view is that the old consensus of $4 per share, which reflects analysts' current estimates of our entire business before the second-quarter action, is about the right estimate for our new continuing operations, excluding the special charges," James Joyce, IBM's chief financial officer, said in a conference call Wednesday evening.

"We feel that the downside in IT demand is roughly offset by the benefits of the actions we have taken," Joyce said.

Faced with a protracted decline in corporate IT spending amid economic uncertainty, IBM implemented three major restructuring moves during the second quarter.

During the quarter IBM: eliminated more than 7,000 jobs, mostly through layoffs, although it has not provided an official tally of the job cuts; announced plans to sell its money-losing hard-disk drive business to Hitachi; and restructured its Microelectronics unit, closing some of its plants and selling others.

Initially, IBM estimated that it would record a total of between $2 billion and $2.5 billion in charges related to the restructuring moves but Wednesday said that total may reach as high as $3 billion.

IBM recorded $2.1 billion, or $1.4 billion after taxes, of those charges against its second-quarter earnings.

As a result, its net income for the period fell 97 percent to $56 million, or 3 cents per share, from $2 billion, or $1.15 per share, during the same period a year earlier.

That does not include results from the disk-drive business, which IBM now is reporting separately as discontinued operations. The company said the disk-drive operations chalked up a loss amounting to 22 cents per share during the quarter.

Excluding the charges, IBM's earnings from ongoing operations amounted to $1.45 billion, or 84 cents per share. Analysts on average had expected the company to report a profit of 83 cents a share, according to a survey conducted by earnings tracker First Call.

IBM's revenue from ongoing operations for the second quarter was $19.6 billion, down 5.7 percent from $20.8 billion in the year-ago quarter. By First Call's count, analysts generally had expected IBM's second-quarter revenue to be nearer $19.4 billion.

IBM's gross margin -- the percentage of sales remaining after subtracting product costs -- was 37 percent in the second quarter. That's down from 38.3 percent in the same period a year earlier but up slightly from the first quarter of 2002.

Investors in extended-hours trade were buying on the news, sending IBM (IBM: Research, Estimates) shares, which rose more than 2 percent on the New York Stock Exchange ahead of the earnings release, up 46 cents to $71.15.

  graphic  RELATED STORIES  
IBM cuts more jobs, sets charge
IBM still swinging axe
IBM cuts research jobs
IBM's got the Big Blues

"IBM is one of these big bellwether companies where their business is so solid that in a year like 2001, where everybody was missing, IBM never missed a quarter," Arnie Berman, a strategist at SoundView Technology, told CNNfn's Money & Markets program Wednesday.

"The first quarter was so brutal for technology spending that even IBM missed the number and chose to lower the bar," Berman added. "But here you have an example of a company that's very big and whose results were not, in any respect, worse than expected."

During the second quarter, IBM's Global Services division was the biggest revenue generator, taking in $8.7 billion, roughly 44 percent of the total. Even so, that unit's revenue fell about 1 percent from the year-ago period as companies continued to defer their large-scale IT projects.

"We did do very well in the transactions over $100 million that we chose to pursue, signing 11 and losing only one competitively," IBM's Joyce said. "But the consistent deferral of mega-deals resulting from customers caution about their own businesses in this economic environment has had a significant impact on the growth of our outsourcing revenue."

Joyce said the company ended the quarter with a $106 billion backlog in upcoming services contracts, which is one of the reasons the company is more upbeat about its financial prospects in the second half.

An improvement in performance at the restructured Microelectronics operation -- which has seen revenues drop 30 percent over the past four quarters -- and an anticipated rise in printer and PC sales also led IBM executives to be more optimistic about the second half, Joyce said.

IBM's computer hardware business accounted for $6.7 billion, or roughly 34 percent, of the company's total second-quarter revenue. That was down nearly 16 percent from the year-ago period.

With $3.3 billion, IBM's computer software unit was the only business line to show a year-over-year improvement in revenue, rising 7.6 percent from the second quarter of 2002.  Top of page

Europe has fined Google $5 billion. But that won't hurt it
Uber fills 'critical' role of chief privacy officer
Google's not alone. Europe has been taking on tech companies for decades

graphic graphic