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July 21, 1991

AT LEAST 17,000 IBMers TO LEAVE THIS YEAR AS SALES PLUNGE 22%, SUMMIT WORRIES SURFACE

By CBR Staff Writer

A stunning 21.8% plunge in outright sales in the second quarter to $8,266m plunged IBM Corp to net profits of just $114.0m, compared with profits of $1,410m this time last year. Turnover overall slumped 10.7% to $14,377m. The company now expects to shed at least 17,000 people this year – but business is declining so fast that IBM’s cost-cutting measures can’t keep pace – costs and expenses actually rose 3.4% compared with this time last year to $14,377m, leaving the company with a wafer-thin operating profit of just $355m. IBM puts the higher costs down to higher than expected acceptances of redundancy offers. An indication of how bad things are in the mainframe business for IBM is that software revenues were up just 0.2% at $2,356m – despite the fact that IBM has increased prices by about 15%: that means that there is real attrition in the mainframe base – if you’ve got the machine, you have to buy the software. We have long warned that IBM’s practice of treating software like a cash cow would end up in it killing the goose that lays the golden eggs, and these figures give every indication that that is starting to happen. Another trend that International Data Corp has identified is that users appear to be trading down from 3090s to air-cooled 9121s – 4391s – at a faster rate than either IBM or IDC forecast. The smaller machines carry lower software charges. The two areas that did see double digit growth were support services, up 15.5% at

3,078m, and rentals and finance, up 12.6% at $1,032m, although in the present climate, it is questionable how profitable that business will be – IBM Credit is likely to have been cutting some pretty keen deals just to win any business at all. Even John Akers was not his usual chirpy self in his statement, having to concede that while we expect the pace of business to improve in the second half of 1991, it is unlikely the company will achieve revenue growth for the full year. So far this year, turnover is down 7.8% at $28,300m and analysts now believe it will be 5% to 6% down for the year – but they may still be being too optimistic: the signs now are that recovery in the computer industry will be as much of a lagging indicator this time as the rate of unemployment generally is after a recession. All hopes are pinned on the ES/9000 Summit models, and there are signs that IBM has shot itself in the foot here – word on the street is that the company is having to ask customers that can to defer installations until early next year, and given the general level of demand, that suggests that the company must have manufacturing problems of some kind. We hear of three UK users waiting for early support Summits – one, expecting his machine in April has had it put back to September, and two expecting their machines this month have not yet got a date. A German early support customer is believed to have had his Summit put back to October. IBM would say only that it is confident that it will ship production models this quarter and that it believes it will ship for the rest of the year all of the new machines that it can build. As for orders for the Summit machines, International Data Corp reckons that there are about 185 for delivery in the third and fourth quarter combined, not a dramatic figure for the first models of a new generation mainframe. Of the orders identified by IDC, 110 are in the US, 75 in the rest of the world, and they split 105 900s, 80 820s. In the US the split is 70 900s, 50 820s. Jim Clippard, director of investor relations, did a quick and gloomy run round the world in a conference call with analysts on Friday, sayin that sales declined in all major product lines. He attributed weakness in the three major geographical regions where IBM does business to competitive pressures and product transitions.

Mother of all excuses

In the second quarter, the tone of European business slowed from the first quarter, business in Asia and the Pacific Rim was weaker, while the US was down at about the same rate as was seen in the first quarter – no Gulf War this time to give the company

the mother of all excuses. Bright spot: he said that Latin America business was strong. Clippard said sales of the new AS/400 Ds were off to a good start in the US – but remember sales are down year on year in all major product lines, and that the PS/2 showed signs of improvement. RS/6000 sales were up year to year but the company had scarcely started shipping this time last year. Indicating that many of IBM’s problems are still its own rather than anything to do with the market, reporting second quarter net profits up 48% at $10.5m on turnover up 14% at $107m, Stratus Computer Inc says that the sole area of its business that declined was OEM sales to IBM, which were down 26% – though that could in part be because IBM has not yet launched the new 80860 RISC-based Stratus machines. Clippard told analysts that IBM had no plans to cut its dividend, and the share price was up $1.25 mid-morning at $99.50 in moderate trading.

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