IBM Q2 earnings at risk, say analysts

Caroline Humer

NEW YORK: International Business Machines Corp.'s second-quarter earnings

targets may be at risk because of dismal tech spending, analysts said on

Wednesday, one day after the world's largest computer maker announced a

restructuring charge of up to $2.5 billion.

In fact, if Armonk, New York-based IBM doesn't come up with any major gains

to offset that $2 billion to $2.5 billion charge -- the majority of which the

company said it will take in the second quarter -- it may post a net loss, one

analyst said.

That would be the company's first loss since its massive restructuring in the

early 1990s. Wall Street cautioned against focusing too closely on IBM's second

quarter, however, saying that the actions by chief executive Sam Palmisano are

going to clear the decks and may help it meet 2002 earnings estimates.

At the same, most analysts stuck by their estimates for the company, saying

that there are too many moving parts to put a number on how demand or the

changes will impact earnings.

Corporations have cut back on technology spending as they try to manage the

economic downturn, causing sharp earnings declines at tech companies, including

IBM, where earnings fell more than 30 percent in the first quarter.

Shares of IBM, the world's largest computer maker, edged up 79 cents, or 1

percent, to $80.10 in early-afternoon trading on the New York Stock Exchange.

The stock has fallen by one-third this year as investors worry about accounting

and wait for signs that the new CEO will start increasing revenue.

IBM said Tuesday afternoon the charge will cover job cuts, the sale of its

money-losing hard disk drive business and a realignment of its microelectronics

business that includes shutting down some older aluminum-based chip-making

capacity.

The charge is about the same size as analyst estimates for IBM's income for

the second quarter, said Jay Stevens, an analyst at Buckingham Research Group.

"The operative number is $2.15 billion in pre-tax income. If the charges

exceed that, as they might because IBM has said $2 billion to $2.5 billion, you

get a loss," Stevens said.

The company hasn't said that it will take any gains on asset sales, such as

hard disk drives, Stevens said. "You just have to take it at face value

right now."

IBM may be quiet, but its competitors aren't



While IBM didn't talk about demand during a conference call on Tuesday about
the charge, its competitors have. And several analysts say, charge or no charge,

that means lower revenue estimates for the quarter, and perhaps the year.

For instance, Carly Fiorina, chief executive officer of IBM competitor

Hewlett-Packard Co., said on Tuesday during an analyst meeting that she no

longer expects a muted second half recovery. "We are seeing a slower

recovery in IT spending than any one of us would have liked," she said.

Intel Chief Executive Craig Barrett agreed with her, telling Reuters that

technology sales won't recover until corporate profits do, and that's not

happening anytime soon. Indeed, influential Goldman Sachs analyst Laura

Conigliaro said IBM may miss estimates for the quarter. IBM said back in

mid-April when it announced first-quarter earnings that it was comfortable with

analyst estimates of 87 cents per share.

Conigliaro said earnings per share could be 5 cent to 10 cents lower if

second quarter revenue growth is 0 to 3 percent instead of Goldman's estimate of

6 percent. "With revenue estimates for technology stocks coming down to

reflect flattish or in some cases sequential declines for the June quarter

consensus and our own revenue estimates of $19.7 billion still feel like they

need to come down," Conigliaro wrote in a research note.

The consensus estimate for second-quarter revenue is $19.7 billion, off 9

percent from a year earlier.

Hitting earnings estimates if revenue fails



But Conigliaro also said the actions could help IBM hit 2002 earnings even
if revenue drops. The consensus is for earnings of $4.10 per share in 2002 on

revenue of $82.97 billion.

Looking at the second quarter alone doesn't take into account how IBM's

lighter headcount, the sale of hard disk drives and the refocusing of

microelectronics could help the second half, she said. IBM chief financial

officer John Joyce said on Tuesday that IBM would feel the financial benefit of

the actions in the second half, but didn't say exactly how.

Bear Stearns analyst Andy Neff said the fact that IBM didn't reiterate its

earnings guidance was a concern for current estimates both the quarter and the

year. But he noted that the restructuring actions hold the longer-term promise

for growth -- IBM's larger goal.

"The bigger picture with IBM is that Palmisano is trying to clean things

up," said Bear Stearns analyst Andy Neff. With your car, you want to go a

certain speed, but the problem is you have anvils in the trunk. Yeah, the anvils

have some value but get them out of the trunk. I think that's kind of what's

going on here," Neff said.

(C) Reuters Limited.