IBM Q3 earnings fall 20% on spending decline

NEW YORK: International Business Machines Corp. on Tuesday reported its first
quarterly earnings decline in two years as global technology spending fell, but
said profits are on track for the fourth quarter.

Based on steady revenues from its computer services business and network
computing sales, IBM said it believes it can meet Wall Street's expectations for
earnings of $1.34 a share in the current fourth quarter, Chief Financial Officer
John Joyce said.

Despite the 20-percent fall in profits, IBM is one of the few technology
companies that didn't warn of a shortfall in earnings following the Sept. 11 air
attacks in New York and Washington, DC. Those attacks hurt some hardware sales,
IBM said, but its recurring revenue from its large services business, which
includes growing outsourcing sales, was not affected.

IBM shares took off in after-hours trading, rising to $104.20 from its close
of $101.85 on the New York Stock Exchange, where it lost 15 cents before
Tuesday's announcement. IBM is up about 20 per cent since the end of 2000,
outperforming the Standard & Poor's 500 index by 44 per cent and the
American Stock Exchange Computer Hardware index by more than 90 per cent.

"In this environment, when many of the companies are certainly reporting
difficult results and reducing expectations and head count ... a company that
can set targets and then meet those targets is pretty nice to see," said
Marty Shagrin, an analyst at Victory Capital, a money management firm with $25
billion invested in equities.

IBM, also known as Big Blue, said net income was $1.6 billion, or 90 cents
per share, down 20 per cent from $2.0 billion, or $1.08 a share, in the year-ago
quarter. Analysts polled by research firm Thomson Financial/First Call expected
IBM to earn 89 cents per share on average, with estimates ranging from 82 cents
to 95 cents per share.

Included in earnings per share is a negative effect of 13 cents per share
related to $91 million lost in currency conversions, a $156-million writedown on
equity investments and about a $100 million charge for the costs associated with
an ongoing work force restructuring, IBM said.

Big blue hangs in there

The Armonk, New York-based company said services revenue rose 5 per cent while
software increased 10 per cent during the quarter from the previous year. But it
said hardware sales declined by 21 per cent as personal computer revenue slid 29
per cent on weak demand and pricing pressures.

The company also saw sales fall 30 per cent in its microelectronics business,
which sells semiconductors to companies like Apple Computer Inc. For the
quarter, sales were $20.4 billion, down from $21.78 billion in the same period a
year ago.

J P Morgan analyst Daniel Kunstler was fairly positive about the results.
"I actually think this is not too bad. The aggregate hardware revenues
don't look terribly good -- down 21 per cent -- that is actually sort of brutal.
But the rest of the mix seems to be hanging in there. Particularly software
looks like a good number, up 10 per cent," Kunstler said.

"The mainframes hung in there, even with Sept. 11 being in the mix, so
overall I don't think we've got too much to complain about," he said.

Analysts had been expecting the company to report weak earnings and during
recent weeks had trimmed their estimates for it as well as competitors such as
Sun Microsystems Inc. and EMC Corp., which warned that the third quarter would
be weaker than expected.

IBM's strength this quarter is due to its broad offering that includes
everything from hardware, such as high-end servers, to software to outsourcing,
Shagrin said. "I think IBM is doing very well competitively, because they
have that whole solution in house," Shagrin said.

Indeed, last month competitors Compaq Computer Corp. and Hewlett-Packard Co.
said they would merge in part to increase the breadth of their computer
offerings.

Standing by the consensus

IBM Chief Financial Officer John Joyce told a conference call that Wall
Street expectations for IBM's fourth-quarter results were "reasonable"
based on the anticipation of steady revenue from services, software, maintenance
and financing.

The Wall Street consensus for IBM's fourth quarter is a profit of $1.34 a
share, according to Thomson Financial/First Call. Joyce also said semiconductor
sales may head higher after the current quarter.

"We believe the third and fourth quarter will be the bottom," said
Joyce, who forecast three months ago that the microelectronics business would
pick up in the fourth quarter.

IBM reported on the same day as microprocessor giant Intel Corp., which said
that earnings fell 77 per cent due to the economic slowdown and weak personal
computer sales. Intel forecast that unit shipment of chips would pick up in the
fourth quarter even as margins decline.

For the third quarter, IBM said its gross profit margin rose to 36.2 per cent
in the third quarter from 35.4 per cent a year ago. The company said it spent
$1.8 billion on share repurchases during the quarter.

Better days are on the way

IBM, after suffering the first quarterly decline in earnings since the end of
1999, said that it will return to the kind of steady quarterly progression in
earnings that investors have come to expect once the global economy starts
growing.

"When the economy recovers, we expect to be in an even stronger
competitive position and return to our model of high-single-digit revenue growth
and lower double-digit growth in earnings per share," Joyce said.

Joyce didn't say when that recovery would occur. "When does worldwide
GDP bottom out, and what is the timing and strength of the recovery? That is the
call I am going to leave to you," he said.

(C) Reuters Limited.