The star of the IBM Corp’s third quarter results issued yesterday (see Top Stories) were the new G5 mainframes, although AS/400 midrange and RS/6000 Unix server revenues were also up significantly; IBM also is apparently showing improvement in the PC area, too. IBM says that S/390 revenues for the quarter increased in the double digits and that MIPS shipments more than doubled compared to this time last year. These numbers contributed mightily to IBM’s $8.7bn in hardware sales (up 4.2%, with gross margins slipping two points to 31.8%) and $3.18bn in software sales (up 4.5%, with gross margins increasing more than four points to 74.6%). As usual, services were the powerhouse behind IBM’s revenue growth, with $5.8bn in sales (up 22.6% with gross margins improving a point to 21.3%). IBM’s maintenance revenues for the quarter were down 8% to $1.45bn (gross margins here held at 46.8%, however), and rentals and financing grew by 6.7% to $1bn (gross margins in this category slipped almost six points to 42.4%). When you do the math, IBM brought in $20.1bn in revenue, up 8% from the $18.6bn it raked in last year’s third quarter. Overall expenses increased by nearly 4%, but IBM bought back $1.7bn in its own shares and managed to pump up neat earnings per share to $1.56, up 15.6% from the $1.35 it earned in the third quarter of 1997 and three pennies higher than the consensus on Wall Street (although some bulls had IBM as high as $1.60 a share). Since this time last year, IBM has purchased almost 50 million of its own shares, the concentration of which has actually given IBM over 5% of that 15.6% in net earnings per share growth. In plain English, if IBM hadn’t bought those 50m shares, it would have only saw 10% earnings growth in this quarter and would have only been able to bring $1.48 per share to its shareholders. It’s a good thing IBM can borrow money at significantly lower rates than the typical American consumer, or else Wall Street wouldn’t have been nearly as happy as it was today. And if they read the subtext in IBM’s results, or listened to the comments of Louis Gerstner, IBM’s chairman and CEO, about the company’s results for the quarter, they are sure to start fiddling with their spreadsheets come the morning. We’re especially encouraged by across-the-board revenue growth in our server group, by ongoing strength in our services and software businesses, and by good improvement in our PC unit, Gerstner said. At the same time, our semiconductor business continued to be hit hard by a prolonged, industry-wide downturn in memory chip prices. While IBM is entering the fourth quarter with some real momentum, we are facing a number of significant short-term issues, including an uncertain global economic environment, ongoing weakness in some parts of Asia and Latin America, and continued price pressures in semiconductors. We’ll have more detailed analysis of IBM’s results in tomorrow’s edition.
