Some of the puzzles in IBM Corp’s fourth quarter and year-end figures have been explained, some are still outstanding. Most people were totally baffled that after all the vast cuts, selling, general and administrative expenses were actually up one percentage point – but chief financial officer Jerome York explained that those costs would have fallen 10% but for adverse currency translations and a one-time accounting adjustment that reduced the figure in the 1993 fourth quarter. But other puzzles remain – the most pressing being how IBM can maintain its improvement this year, when mainframe sales were off a daunting 30% in the fourth quarter and the company is budgeting for a further 50% decline in mainframe sales this year. York says that sales of personal computers and workstations will plug that gap, but it is hard to see volume growing that much, and even harder to see how IBM’s two lowest-margin computer lines can replace the profit lost from slumping sales of its highest-margin product line. IBM accepts that the current quarter is going to be rotten – even with a very easy comparison with a poor first quarter 1993, and York told analysts only that there is a possibility that IBM will report a break-even first quarter. I did talk about the possibility, not the probability (of a break-even first quarter), York said later in a telephone interview with Reuter, citing seasonality factors. IBM said that during the fourth quarter, it could have sold more mainframes if they were built and that they were heading into the first quarter with a backlog of orders for mainframe computers – but the company has been leading the price-slashing in the mainframe business, so those traditionally gross gross margins are not there any more. There are also falling profit margins in some other businesses that have had strong earnings: gross margins fell in software maintenance and financing, and This is a fairly recent event, said PaineWebber Inc’s Stephen Smith: I don’t think people are focused enough on this. York acknowledges the scale of the problem, and the Wall Street Journal quotes him telling analysts The battleship is starting to turn and sail in the right direction, but we realise we have one hell of a lot of work to do.
Ain’t a candy store
This ain’t a candy store on Main Street, and it won’t be turned around in one or two quarters.York said he is conservatively planning on flat revenue for this year and is setting budgets accordingly. On the expenses side, York said he and his team cut $2,800m out of IBM’s expenses in 1993 and plan on taking out another $3,000m this year. That, he suggested, should be enough to offset continued profit decline from the loss of mainframe sales. Research and development was cut by a whopping 20% in the fourth quarter, 14.8% to $5,558m in the year, and analysts say that another $1,000m is to come out of that this year, which would be an 18% cut. IBM also suggested that gross margins in hardware would be in the 30% range, down from 1993 levels of 32.3%. IBM also indicated software revenues may fall in 1994 and that revenues from services would shrink as a result of its sale of Federal Systems Co. Another concern is that with overall gross margins higher than expected, personal computers sales must have been lower than expected.
