By William Fellows

IBM Corp saw a collapse in hardware sales that it attributes to a slowdown in spending due to Y2K issues. Earnings per share were $0.90, in line with expectations. Net income rose 18% to $1.75bn, though IBM eked out a 5% revenue growth at $21.14bn. The company warned it doesn’t expect normal buying patterns to return until the second quarter of next year. IBM will miss the $1.33 consensus earnings estimates for the fourth quarter by $0.15 to $0.20 and expects the first quarter to be flat or below the first quarter of this year which came in at $0.78. The estimate for the first quarter of financial 2000 was $0.90. It now expects to finish the full year with single digit revenue and low double digit income growth.

The culprits were S/390 where shipments were down 18% and revenue was down 40% – probably to around $783m going by analysts’ models – and the troubled AS/400 division which saw revenue dip 30% to around $532m by the same model, even though IBM said it had fixed Europe, its problematic sales channel. RS/6000 business grew in double digits year over year but appears to be down sequentially.

IBM must have lost an awful lot on PCs again. Even though revenue was up 11% and unit ships out of the channel grew 15%, it was hurt by a fall-off in sales of commercial and consumer desktops. NetFinity servers and ThinkPads combined account for 50% of the PC hardware revenue stream now, growing 37% year over year, although NetFinity business is estimated to have been around $500m, the same as last quarter, using analysts’ models. ThinkPad ships were constrained by lack of flat screen displays. It claims PC business losses declined year over year and sequentially. Overall server sales were down 29% on what IBM says was a tough year-over-year comparison, and buying conditions that are unique to it.

Overall hardware revenue was down 2% to $8.8bn; software rose 8% to $3.3bn; and services was up 11% at $7.9bn. It signed 10 deals worth over $100m including the $480m deal with IBM Global Services, said to be the largest outsourcing deal any Japanese manufacturer has made. Operating systems were one quarter of software sales, down in the quarter, while middleware, which is 75% of software revenue, rose 14%. Tivoli revenue grew 22% versus the industry average of 15% and WebSphere revenue, while small, tripled in the quarter. Revenue from IBM’s technology group grew 10% on the back of a 40% increase in IBM microelectronics sales which were driven by custom logic sales which grew over 100%.

Product transition from Ramac to Shark in storage, and the effect of the announcement of the sale of its network hardware business hit those two revenue streams hard. It also took a hefty charge for consolidating the technologies of its various server storage products to using single components.

The Y2K effect is strange given that for the last couple of quarters IBM had reported seeing no significant Y2K spending bumps in the pipe. It said that after experiencing weaker than expected mainframe MIPS sales this quarter it re-assessed customers buying intentions and found that more were closing their wallets because of Y2K than expected. In part because those same customers have already bought additional capacity to deal with Y2K issues or had bought more MIPS than usual to do Y2K. Y2K is principally a hardware issue IBM says.

IBM reported third-quarter net income up 18% at $1.75bn over $1.48bn on revenue up 5.2% at $21.14bn over $20.09bn. Earnings per share came in at $0.90. At the nine month mark net income was up 41% at $5.62bn over $3.98bn on revenue up 12% at $63.36bn over $56.53bn. Amercias revenue grew 1% to $9.6bn; Europe was up 4% at $5.8bn and Asia Pacific was up 10% at $3.7bn in the quarter.