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April 22, 1994

IBM SPRINGS PLEASANT SURPRISE WITH FIRST QUARTER PROFIT AHEAD OF FORECAST

By CBR Staff Writer

IBM Corp managed to wrong-foot analysts with its first quarter figures yesterday, sprining a pleasant surprise with earnings per share of 54 cents before exceptional items where the consensus among analysts had been for no more than 10 cents a share, with the most optimistic going for 19 cents, and the bears seeing a loss of seven cents. The explanation appears to be that the quarter benefitted from the unusual mainframe backlog left over from the fourth quarter of 1993 – mainframe sales were still down on the same period a year ago, and that was hardly a demanding comparison. But where hardware sales overall plunged in the fourth quarter, they were substantially up this time, by 9.2% to $6,268m – and the gross margin improved a little, to 30.1% from 29.0%. But the fact that IBM is being forced to respond to customer demands for cheaper software is doing its margins in that sector of the business no good at all. Software business was up 2.5% at $2,583m but margins slumped to 51.2% from 62.8%. Services, where IBM is intending to build a big new business, actually fell, by 3.8% to $1,836m. The comparison however is a false one, because here IBM has included the Federal Services Co in the year-ago figure and stripping that out leaves services business up 21%. What is real is that gross margin here was a thin 15.3%, down from 21.6% a year ago remember Electronic Data Systems Corp achieves gross margins of 24%, which means that it can outbid IBM on any contract it really wants, and leave the ones it judges to be insufficiently profitable to IBM. Mainframe sites going dark meant that maintenance business slipped, falling 2% to $1,768m, but IBM does have its house in order here, and margins improved marginally – to 50.7% from 49.1%. Its rentals and financing business is on the skids, but the business it is still writing looks much better – turnover here plunged 15.5% to $918m, but the gross margin on the business surged to 60.2% from 56.6%. Gross margins overall were 36.9%, down from 39.5%, but the first is a false figure: without the charge for realigning software amortisation, gross margin would have been little changed, falling just a shade at 39.2%.

Asia was up 13%

Geographically, US business was up 6% at $5,300m in the quarter, excluding Federal Systems, Europe was up 3% at $4,700m and Asia was up 13% at $2,300m – Asia is much more than bombed-out Japan these days. Latin American revebues were up 14% at $600m. Underlining how fast IBM is having to run simply to stand still in the utterly transformed climate of today’s computer industry, all those job and other cuts slashed sales, general and administrative expenses by 22.8% to $3,149m, and they now represent $23.5% of turnover, down from 31.2%. It has made good on its promise taken an axe to the research and development budget (many people would have preferred to see it keep spending up here and simply exploit more of what it invented – or license it to someone else that would), cutting it 18.8% to leave it at $1,100m in the quarter, just 8.2% of turnover, down from 10.4%, coming down to the low end of what is seen as healthy and prudent for a diversified technology company. The fact that IBM is having to borrow real money these days is highlighted by the fact that at a time of historically low interest rates, interest charges rose 35.5% to $414m.

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