IBM Q4 earnings fall on low tech spending

Caroline Humer

NEW YORK: International Business Machines Corp. said on Thursday that

fourth-quarter earnings and revenues fell from a year earlier as the economic

downturn hit spending on computer systems and services.

IBM's third straight quarterly revenue decline, which included a surprising

fall in services revenue, disappointed investors and drove the stock down 4.3

per cent, or $5.20, to $114.70 in after-hours trading on Instinet.

It had closed at $119.90 on the New York Stock Exchange before the earnings

were announced, a gain of $2.50 that was quickly erased.

"People didn't like, I'm sure, that services revenue were down. That was

probably the surprise here," said Soundview analyst Gary Helmig. "Of

course the stock was up two bucks during the day, probably on anticipation of

something better than what we saw."

Armonk, New York-based IBM sounded a positive note for 2002, however, backing

Wall Street estimates for an earnings increase and saying that personal

computers and microchips will return to profits due to cost cuts and that

services should hit double-digit growth in the second half.

"Business conditions remain difficult as we enter the new year, although

we believe that our business will strengthen as we move through the year,"

IBM chief executive Louis Gerstner said in a statement. IBM said it earned $1.33

per share, down from the $1.48 per share it earned in the year-earlier quarter,

but in line with analysts' expectations. It posted net income of $2.3 billion,

down from $2.7 billion a year-ago.

IBM -- which sells everything from PCs to giant mainframe computers to

computer services -- said its revenue declined 11 per cent to $22.8 billion from

$25.6 billion during the year-earlier quarter.

The company attributed the decline primarily to weakness in personal

computers and sales of semiconductors and hard disk drives to other computer

makers. IBM, for instance, sells microchips to Apple Computer Inc..

Revenues fall short of expectations



Analysts had expected earnings of $1.32 per share within a range of $1.22 to
$1.37 per share on revenue of $23.8 billion, according to research firm Thomson

Financial/First Call.

Services revenue, the company's largest division, had been expected to grow

but instead fell 1 per cent to $9 billion. The company said that many of the

orders it had expected earlier on in the quarter came in late, pushing revenue

into 2002.

IBM said it had about $15 billion in new contracts in its services division

during the fourth quarter, pushing the total backlog of orders up to $102

billion. For the year, IBM brought in $85.9 billion in revenue, down from $88.4

billion in 2000.

IBM is one of many technology companies that was hurt in 2001 as the economy

slid into a recession and corporations that spent freely on new hardware

tightened their belts. Microchips, for instance, are in their worst downturn

ever.

"I think it is mostly economy. This is a good company, they are well

run," said one analyst at a money management firm that owns IBM shares.

"It's not great, but it doesn't hurt me. You don't expect extremely great

things out of companies now."

Other analysts also gave IBM credit for meeting the Wall Street earnings

consensus in a tough environment, but said it needs to show revenue growth.

"Kudos for the strong expense management, but the Street generally prefers

revenue growth to cost containment," Sanford C. Bernstein analyst Toni

Sacconaghi said.

IBM should be able to meet Wall Street's forecast for earnings per share in

2002, chief financial officer John Joyce said in a call with analysts on

Thursday. That forecast is for earnings of $4.81 per share compared with 2001

earnings of $4.35 per share.

Joyce said IBM will be at an advantage in 2002 to its competitors, which

includes companies like Sun Microsystems and Hewlett-Packard Co. and Compaq

Computer Corp.. HP and Compaq are planning to merge.

"With the irrational exuberance associated with the dot-com phenomenon

behind us, customers are really starting to expect more of their IT

vendors," Joyce said in a call with analysts. "When the economy turns,

customers are not going to return to that roll your own IT era."

That growth will come as the personal computer business and microelectronics

cuts costs and return to profits and the company's software, server, storage and

services business increase market share, Joyce said.

Software picks up when hardware falls



IBM said that hardware revenues were off by 24 per cent at $8.7 billion with
sales of personal computer and printing division declining by 32 per cent.

Revenues from mainframe servers were essentially flat while sales of its

servers based on the widely used Unix operating system were lower. Revenue from

data storage increased.

Software revenue, meanwhile, grew by 6 per cent to $3.8 billion. The company

said data management software grew 48 per cent and software used for Internet

applications, called WebSphere, grew 43 per cent.

"IBM has transformed itself from a hardware and software company to a

services company." said Sam Albert of Sam Albert Associates, a consultancy

based in Scarsdale, NY "The competition would die for that backlog."

(C) Reuters Limited.