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July 22, 1994

IBM WRONG-FOOTS ANALYSTS AGAIN BUT THIS TIME GIVES THEM PLENTY TO CHEER ABOUT WITH $1.14 A SHARE

By CBR Staff Writer

IBM Corp delighted Wall Street with much better than expected second quarter figures – $1.14 a share where the mean forecast was for only 79 cents, and the range was 0.50 to a high of only $0.84 a share. The shares put on four dollars on the figures at $60 and change. IBM also pleased the market by saying that it is ahead of its cost-cutting plan and that it has found another $1,000m of fat in its operating expenses that it can cut out between now and 1996, trimming a hefty $8,000m from its operating costs by then compared with the level in 1992. A significant amount has come out of the research and development budget which is down a whopping 20.7% in the quarter to $1,091m while those selling, general and administrative expenses fell a healthy 12.1% to $3,935, representing 7.1% of turnover, down from 9.2% a year ago. The $689m profit compares with a pre-charge loss of $40m a year ago. The turnover for the quarter was up 3% at $15,400m against figures restated to take out the Federal Systems Co contribution. The turnover growth slowed from the first quarter, and is up 4% for the half. Louis Gerstner has not been tempted to adopt the old John Akers chirpiness and warns that We are still far from where we need to be, but we are showing steady improvement. Second-quarter turnover was flat in the US and Europe, at $5,900m and $5,500m respectively, but Asia-Pacific revenues shot up 14% to $2,800m; Latin America was flat at $620m, and currency was slightly adverse. Hardware sales rose 3% to $7,700m and were sold at a gross margin of 33.2%, up from 30.9%, with high-end mainframe demand still exceeding supply, and turnover falling as a result of pricing pressure. And despite IBM making over 1m PowerPC 601s, it couldn’t build them into RS/6000s fast enough, and absurdly, the company says that demand also exceeded supply in the second quarter for PowerPC-based RS/6000 systems, and also for some ThinkPads and high-end disk drives. Turnover from the AS/400 fell compared with the same period of 1993 as a result of the transition to the new models, but RS/6000 revenues increased over the second quarter of last year. Personal computer revenues increased in the second quarter – but not in the US, where results were sluggish. Total software revenues were flat in the second quarter compared with a year earlier at $2,726m but the margin on it rose to 62.5% from 62.0%. Services revenues increased by 24% after adjusting for the sale of Federal Systems, and margins improved – but only to 19.6% from 17.2%: IBM is thought to need at least 24% to get profit from services through to the bottom line. Maintenance fell 3.3% to $1,796m and gross margin on it fell to 49.7% from 53.6%; rentals and financing plunged 21.3% to $841m, but margins on it are gross if static at 59.4%, down from 59.8%. The overall gross margin was 39.8% compared with 39.7% in the second quarter of 1993. Total expenses declined by 18% in the second quarter compared with the year-earlier period as a result of IBM’s continuing focus on expense control, workforce reductions and facility consolidations. IBM also reports that it completed the second quarter with cash and marketable securities of approximately $8,600m and has cut total debt by a full $2,100m since December 31 leaving it at $25,200m.

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