IBM Q3 to be hit by slack IT spending, chip sales

Caroline Humer

NEW YORK: Weak microelectronics sales and a technology spending downturn due

to the economic slowdown will cut into International Business Machines Corp.'s

quarterly earnings, analysts and investors said on Wednesday.

Following the Sept. 11 attacks, analysts have lowered earnings expectations

for the Armonk, New York-based computer hardware and services giant,

anticipating that companies would stop buying big ticket items like computers.

"I think the main issue for Q3 is, in general, how much is IBM being

able to withstand global weakness in IT spending? Can it deliver the kind of

revenue that people are expecting?" said Toni Sacconaghi, an analyst at

Sanford Bernstein.

"The second question is, how big of an impact is weakness in

microelectronics?" Sacconaghi said. He lowered his estimates for

third-quarter, fourth-quarter and 2002 earnings on Wednesday.

Analysts expect IBM to post earnings of 90 cents a share on revenue of $20.76

billion when it reports its third quarter results on Oct. 16, according to

research firm Thomson Financial/First Call. Earnings estimates range from 82

cents a share to 90 cents a share. That would put earnings down 17 per cent from

the second quarter and 35 percent from the year-earlier quarter.

IBM'S recurring revenue softens blow



IBM is one of the few hardware makers that hasn't warned of a shortfall this
quarter. In the past two weeks, competitors, including EMC Corp. and Sun

Microsystems Inc., have warned of weak sales as demand fell after the attacks.

IBM hasn't suffered as much as its rivals because it has a more stable stream

of recurring revenues from its services and software businesses, analysts say.

While hardware, software and microelectronics are expected to be weak, investors

said, service revenue isn't.

"If you do see weakness in the services business that would be a cause

for concern, much more so than if you saw weakness in hardware, or

microelectronics, software," said John Park, an investment officer for

Independence Investment in Boston, a money management subsidiary of John Hancock

Financial Services.

In those three areas, he said, "the market clearly expects to see some

level of shortfall." IBM's shares are unlikely to decline on weak revenues

in those areas he said, but could be affected if the company gives guidance that

doesn't fall within expectations.

Currently, analysts expect earnings per share to increase to $1.35 in the

fourth quarter on revenues of $24.38 billion. For 2002, analysts see earnings of

$5 a share, up from the $4.40 expected in 2001.

Microelectronics recovery may be delayed



Influential Goldman Sachs analyst Laura Conigliaro, who already cut estimates
for IBM two weeks ago, brought down her estimates for the fourth quarter and for

2002 on Wednesday, citing weak IT spending going forward.

Conigliaro also said that she expects semiconductor sales, which make up the

microelectronics business, will remain under pressure through the first quarter

and probably into the second quarter of 2002. IBM has warned analysts that

microelectronics could be a factor in its ability to meet its financial

objectives this quarter but has said it expects a recovery.

IBM Chief Financial Officer John Joyce said during the second quarter

conference call in July that he expected microelectronics to be down 10 per cent

to 20 per cent in the third quarter from the second quarter as its customers

worked off $250 million in IBM inventories. But Joyce said he expected it to

pick up in the fourth quarter.

IBM makes semiconductors used in communications sector, enterprise servers

and storage and in the embedded area, which would include game systems.

Bernstein's Sacconaghi said he expected the decline in microelectronics

profits in the third quarter to account for 10 cents to 15 cents a share of lost

earnings compared with a year ago.

(C) Reuters Limited 2001.