IBM saw its expected drop in profits in the first quarter, its first for two years, but managed to stay ahead of analysts' estimates.
Net profits fell 13 per cent to $1.04 billion or $1.06 per share, just better than the Wall Street consensus estimate of $1.05 just before the results were announced. Revenue was lacklustre, up just two per cent to $17.6 billion, and analysts agree that boosting revenue growth is the greatest financial challenge still remaining for the giant's leaders. IBM said revenue growth would have been six per cent if it were not for the strong dollar - still two per cent less than the average increase IBM has seen over the past year, if a constant dollar rate is assumed.
The company had warned of a profits shortfall in January and again the day before it reported its figures (see Newswire 20 April), but was upbeat about prospects for the rest of fiscal 1998. "The first quarter does not signal that you should come to any new conclusions regarding the full year," said interim chief financial officer Lawrence Ricciardi - prompting some analysts to hold back on cutting full year forecasts.
The underlying factors behind the profits drop have been well documented and many are affecting the whole industry - excess inventory in the PC channel leading to lower prices; the Asian economic crisis; the strong dollar.
Some are more specific to IBM, but short term, such as various costs associated with acquisitions and the massive marketing effort at the Nagano Winter Olympics.
More worrying were some potentially longer term weak spots. Hardware sales fell by over eight per cent and growth in newer software products - seen as a key IBM strength these days - fell off to only two per cent.
Gross profit margins were slashed from 38.1 per cent a year earlier to 36.6 per cent, and Ricciardi warned that PC price wars and Asian weaknesses will continue to affect the results.
However, analysts were generally cautiously positive, claiming IBM had coped well with a "horrendous" quarter in the PC sector and pointing to strength in areas such as storage and services. The latter saw a 22 per cent growth in revenue to $5 billion and was the star of the results. A more surprising highlight was the AS/400 mini, which saw its first sales growth for five quarters. Mainframe revenue fell because of reduced prices, even though IBM shipped 45 per cent more mainframe Mips than in the previous year, a record increase.
Regionally, north America did best with four per cent revenue growth, Europe lagged on two per cent, while Asia fell back by six per cent.
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