IBM did slightly better than expected in its fourth quarter, despite a decline in its hardware business. But the good news was offset by a warning that the current first quarter will show lower profits.
Fourth quarter net earnings were $2.1 billion, or $2.16 per common share, a modest growth from $2 billion in the year-ago quarter and just above the consensus estimate of $2.15 per share. Revenues grew by three per cent, to $23.7 billion.
IBM said that its revenue figure was heavily impacted by the rising exchange rate of the dollar. At constant currency, revenue growth would have been eight per cent. The company also claimed that weak consumer demand in Asia eroded profits during the quarter.
However, hardware sales actually declined by one per cent to $11.5 billion, with only the Unix-based RS/6000 product line showing growth. Software sales grew by one per cent to $3.8 billion, with the bulk of the revenue growth coming from services, up 18 per cent at $5.9 billion.
For the full year, IBM saw its profits rise 3.9 per cent to $6.09 billion, on revenue of $78.51 billion (up from 75.95 billion in 1996).
In a conference call after the earnings announcement, IBM's chief financial officer Larry Ricciardi warned that first quarter revenues will fall short of 1997 levels by as much as $0.10 to $0.15 per share. Ricciardi said this earnings decline was related to what he called an "unusual confluence of items", including costs related to the purchase of Software Artistry by its subsidiary Tivoli, and marketing efforts for the Nagano Olympics, as well as currency exchange pressure and the Asian economic problems.
IBM announced its earnings after the close of trading on Tuesday. Rumours of better-than-expected results had driven the company's shares sharply higher during the day, closing at $107.687. But the shares lost two points in after-market trading.
Analysts were only moderately impressed with IBM's results. "It was a reasonable quarter", commented Kimball Brown, an analyst with Dataquest, "But where is the growth going to come from?"
Brown said IBM is still betting too much on its high margin, but declining, proprietary hardware business. "They should be concentrating on the growth parts of the industry", said Brown. "They aren't jumping on the NT bandwaggon. That is worrying."
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