Making it pretty clear that the company has given up any hope of shipping its 3990 disk drives before the end of the year, IBM yesterday hit what had been an optimistic Wall Street with the news that its third quarter figures will be very storm-damaged and that it will be touch and go whether it manages to show any profit advance for the full year. The company told analysts that their forecasts of per share earnings between $2.10 and $2.30 a share for the third quarter, against $2.10 last time, were way too high and suggested that they should redo their sums to show between $1.40 and $1.80 a share, implying a decline of at least 14% for the quarter on what was a rotten third quarter last year, when profit rose only 3% and sales 5%. As for the year, the company is suggesting analysts should go for $9.50 to $10 a share compared with $9.80 a share for 1988. IBM blames three factors for a reverse that while not unexpected among more bearish observers, caught the financial community completely on the hop – and is in marked contrast to the statements coming out of the company only last week, when IBM said that the strength in its US business that characterised the second quarter continued into August, and that the US would see its fist up year since 1985 (CI No 1,266). The first is the effects of the transition to new products, which presumably means the lack of the new top-end disk drive, although it could also mean users waiting for the next 3090 kicker too. The company says that revenue and cost impacts related to new product introductions will be reflected in the third-quarter results. The second factor is that IBM Credit Corp has been writing leases that third parties leasing companies regard as remarkably optimistic with regard to the residual value assumptions they imply: as a result, IBM says that customers in many countries, particularly in the US, are financing more of their equipment purchases by leasing from IBM. While the effect of this shift is unfavourable in the short term, it adds, it will result in additional revenue and profit over time. And, as we highlighted way back in May, before the idea seemed to have occurred to IBM (1,178, 1,183) the fact that IBM is doing as much as 58% of its business outside the US these days leaves the company very vulnerable to any rise in its value. IBM says that the strength of the dollar has been greater than anticipated, which has an unfavourable effect on reported results, and that if the effects of the strengthened dollar and the shift to IBM leases continue for the remainder of 1989, it will also be difficult for the company to achieve full-year results within current range of estimates.
