IBM results. The strength in computers and the outlook for continued IT spending is relevant to AMD. The weakness in IBM services is irrelevant. The stock has tanked 3.1% after hours - so we are not alone!
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IBM Profit Rose 16% in 1st Quarter
Server Business Powers Up
As Company Sees Recovery
In Technology Spending
By WILLIAM M. BULKELEY
Staff Reporter of THE WALL STREET JOURNAL
April 16, 2004; Page A3
International Business Machines Corp., saying the technology-spending recovery appears to be gathering steam, reported a 16% rise in first-quarter earnings on an 11% increase in revenue.
Big Blue's executives said they saw signs of a corporate-spending pickup, expanding on the consumer-led electronics-industry gains reported by other high-technology companies.
While the Armonk, N.Y., company had big gains in its computer-server business, investors were disappointed by the performance of IBM's services business, which accounts for half of its revenue. For the first quarter, IBM reported that net income rose to $1.6 billion, or 93 cents a share, from $1.38 billion, or 79 cents a share. Revenue rose to $22.25 billion from $20.07 billion, but much of the improvement reflected gains from the weakness of the U.S. dollar. Adjusted for currency, sales were up just 3%.
IBM reported its results after the close of regular trading. In aftermarket trading, IBM shares fell $2.89, or 3.1%, to $91.08. At 4 p.m. in New York Stock Exchange composite trading, IBM was up 27 cents at $93.97.
In a prepared statement, Chief Executive Samuel Palmisano said the revenue growth came from "all geographies" and reflects a "strengthening economic recovery." He added: "We remain enthusiastic about our prospects for 2004."
John Joyce, chief financial officer, said sharp growth in sales of big computers indicates that chief information officers "are increasing their capital budgets now." He said "they haven't invested in hardware for quite some time. Their infrastructures are beginning to get old."
In a conference call with investors, Mr. Joyce said the company thinks analysts' estimates of earnings for the year are "reasonable." According to Thomson First Call, analysts expect full-year earnings per share of $4.93, up 14% from $4.34 last year. Analysts expect revenue for the year to rise 7.4% to $95.73 billion, according to Reuters Research.
The IBM results followed a spate of other quarterly reports of solid sales and earnings gains for companies ranging from chip makers Intel Corp. and Advanced Micro Devices Inc. to storage-systems maker EMC Corp., most of which compete with some parts of IBM, the biggest company in the information-technology industry. However, Sun Microsystems Inc., whose servers compete directly with IBM's, reported that revenue fell 5% in its fiscal third quarter.
Laura Conigliaro, an analyst with Goldman Sachs Group Inc., said even after adjusting for currency, IBM's real revenue growth was better than she had expected. Still, she said IBM needs to boost profitability in its services operations, particularly consulting. She said: "You need to see the picture for next quarter to see how business is really treating them."
The biggest factor in IBM's gains was the improvement in its systems business, which sells big computers and storage devices to companies and governments. Hardware sales, led by a 34% gain in mainframes, rose 16% to $6.7 billion.
Personal-computer sales rose 18% to $2.83 billion, led by strength in laptops, but the unit still reported an $11 million loss.
The semiconductor portion of the hardware business continued to struggle, with sales down 9% from a year ago, and the unit posted a loss of $154 million on a pretax basis. Mr. Joyce said the semiconductor business was hurt because it received $100 million less from selling patented technology this year than last year, but he said that will be made up in the current quarter because of the sale of technology to Applied Micro Circuits Corp. However, he said the percentage of good chips produced at the year-old semiconductor plant in East Fishkill, N.Y., still is too low for profitable operation.
IBM's services organization, which accounts for half its revenue, reported 9% growth but revenue was up just 1% after adjusting for currency. Pretax income rose less than 1%, reflecting lower profit margins because of increased investment in computer facilities. The consulting business, which typically lags behind a hardware-spending recovery, rose 4%. IBM said it signed $10.5 billion in new services contracts in the quarter, boosting its backlog to $120 billion.
Marty Shagrin, an investment manager with Victory Capital Management, an IBM holder, said services "contract signings were a little weaker than people expected," and profitability "continues to be a bit of a struggle."
IBM's software-business revenue rose 11%, or 3% when adjusted for currency gains, to $3.5 billion.
Mr. Joyce said that compared to the year-earlier quarter, IBM's results were hurt by two factors. He said the costs of pensions and retiree heath insurance rose $187 million, and worker severance costs rose $85 million.
Write to William M. Bulkeley at bill.bulkeley@wsj.com
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