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IBM posts sharp drop in quarterly profits

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CIOL Bureau
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By Caroline Humer



NEW YORK: International Business Machines Corp. on Wednesday said it eked out a second-quarter profit of just a few pennies a share as the world's largest computer maker took a $1.4 billion charge to exit money-losing businesses and cut jobs.



But even without the big charge, earnings at IBM, which sells everything from computer software to microchips to computer services, fell sharply as corporations concerned about their own bottom lines cut back on technology spending.



The stock initially rose in after-hours trade, and then traded near flat, as investors were relieved that the earnings appeared to be in line with expectations and contained none of the bombshells that have rocked the technology sector.



But the Armonk, New York-based company's lauded services business, which has become its biggest revenue line, declined for the third quarter in a row as companies both pulled back on existing deals and failed to sign new ones.



"It's almost the kind of situation that as Global Services goes, so goes IBM, and that's kind of how they've restructured the company. That is the long-term driver of the stock," said Marty Shagrin, an analyst at Victory Capital who found no major surprises in the quarterly report.



IBM's stock has fallen more than 40 percent so far this year as investors have worried about how the industry giant will turn its stagnant revenue growth around and amid concerns about a lack of financial disclosure.



Chief Executive Sam Palmisano, who took over for Louis Gerstner on March 1, called it one of the most difficult markets IBM had seen in decades but said he remained confident that the company would gain or hold share in key areas.



IBM fared well, given the woes in the technology sector, said Sunil Reddy, portfolio manager at Fifth Third Bank in Cincinnati, Ohio, which owns IBM shares. "This is one of the most difficult IT spending environments and IBM seems to have come through," Reddy said.



IBM Chief Financial Officer John Joyce said the declines in revenue aren't as steep as they were in the past. "Going into the third quarter of this year ... we're not sliding like we were last year," Joyce said.



He reined in expectations for 2002 only slightly, saying the company expects earnings, excluding its money-losing hard drive business and the charges, to be around $4 per share. That's what analysts are currently expecting, without factoring in the sale of that business, he said.



The company, whose results are a bellwether for the influential technology industry, announced plans in June to sell most of its hard-disk drive assets to Hitachi Ltd. for $2.05 billion.



IBM said it earned $56 million, or 3 cents per share in the second quarter, down from $2.04 billion, or $1.15 per share, a year earlier. That includes an after-tax charge of $1.4 billion, or 81 cents per share. IBM said it earned 84 cents per share excluding the charges.



Services revenue


IBM said its second-quarter revenue was $20 billion, including $379 million from its hard-disk drive business. Excluding the hard-disk drive business, the company said it booked $19.65 billion in revenue, down from $20.8 billion.



Revenue in its closely watched services business fell 1 percent to $8.7 billion from $8.74 billion a year earlier.



Joyce said IBM failed to sign three big services contracts it had hoped for this quarter, creating a shortfall of several billion dollars. He lowered his 2002 revenue estimate for the division, saying he expects modest revenue growth in the second half of this year compared with previous expectations for double-digit growth in the fourth quarter.



"Once the economy turns around, their long-term signings might increase rapidly, but it still says that their long-term revenue prospects are down at least until the economy improves," said Tom Bittman, analyst at technology research firm Gartner Inc.



IBM's hardware business continued to decline, with revenue off 16 percent to $6.67 billion from $7.9 billion, excluding the hard-disk drive business. Software revenue, however, rose 8 percent to $3.27 billion from $3.04 billion a year earlier.



IBM in June said it would take a pretax charge of $2 billion to $2.5 billion, primarily in the second quarter, to cover job cuts, a restructuring of its microelectronics business and the sale of its hard-disk drive operations.



IBM upped the charge's total on Wednesday, saying that as it continues negotiating with Hitachi on the sale of the disk drive business it may take more write-offs this year that push that range up to $2.5 billion to $3 billion.



IBM shares fell more than 41 percent this year while the broader American Stock Exchange Computer Hardware Index has dropped 28 percent. Shares on Wednesday rose $1.68, or 2.4 percent, to $70.69 while the hardware index fell 2.5 percent.



© Reuters

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