IBM Corp has got everyone so suspicious these days that when it comes out with better-than-expected figures, the first question raised is how have they done it? The surprise in the third quarter was that sales were much better than expected, and so everyone wonders how this was achieved: couldn’t have been mainframe sales, the AS/400 is only doing so-so and the RS/6000 is too small to make any real difference. Which suggests it has to be the enormous volume in personal computers – but to get that figure to fill in the gap from everything else, IBM had to be feeding enormous inventories to resellers: if those machines end up in offices and homes by the end of the year, well and good, if not, IBM could see a nasty dent in the fourth quarter as resellers postpone or cancel orders. The personal computer equation is working in IBM’s favour at present too: it now sells far more machines in the US than Europe these days, so that the total figure is less damaged by the fact that Europe is flat on its back while the US is reasonably healthy. The loss for the quarter was only $70m or 12 cents a share, substantially below consensus estimates, and the dividend was maintained at 25 cents, but although the shares started trading $1.125 at $46 even, they soon ran into profit-taking and were down at $45.25 by mid-morning. The striking aspect of the figures was that the overall outturn was so much better than expected when every sector except services were down in the quarter. Hardware was off 1% at $6,957m, software was down a disconcerting 3.3% at $2,648m, maintenance was off 5.6% at $1,823m – both those last two point to mainframe sites going dark – and rentals and financing plunged 14.2% to $1,026m. Only services were up, a hot 26.5% at $2,289m – but there are suspicions that an awful lot of the value of some of those five- and 10-year agreements is going into the first year’s turnover and profits. And IBM said gross margins in services declined as a result of continued investments in the services business and expenditures associated with higher product volumes, primarily in personal computers. Overall, turnover was off only a smidgen at $14,743m. Gross profit fell 17.4% to $5,602m, but the company did manage to cut its selling, general administrative and research and development expenses by 11.8% to $5,631m.

Uncompetitive

The company says that it can return to profitability, but only with with continued reductions in costs and expenses – it acknowledges that its cost structure remains uncompetitive, and gross margins, while essentially flat for the last four quarters, will continue to come under pressure. Louis Gerstner, chairman and chief executive, said that although overall results remain unsatifactory, the third quarter included some encouraging signs. Nevertheless, turnover in the US held only steady year-on-year, while Asia and Europe remained difficult. Revenues from the personal computer business grew strongly – but gross margins in personal computers continued to be under pressure. And hardware sales from mid-range as well as large systems declined, as did high-end disk drive and workstation revenues – you didn’t think the RS/6000 was really going to meet those ambitious targets, did you? IBM also says it remains on course to cut its global workforce to around 255,000 by the year-end.