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March 26, 1987

IBM’s DRASTIC PROFIT PLUNGE “TO BOTTOM OUT THIS QUARTER” – E F HUTTON ANALYST

By CBR Staff Writer

The current quarter, just ending, will mark the nadir in IBM’s profit misfortunes, E F Hutton analyst Michael Geran believes, and he looks for the company’s 1987 earnings per share to stage a modest recovery to $8.50 from the dismal $7.81 to which they plunged in 1986. He looks for revenues to grow 6.5% this year, but 93% of the increase to be accounted for by software and services, with US sales of processors and peripherals continuing their decline. For 1988, he sees hardware growth of 8% while growth in software and services begins to moderate, for an overall improvement of 12.5%. The table below shows his forecasts in detail. Office systems includes personal computers and other workstations. One of the most striking aspects of the figures is the devastating plunge in peripherals in the US 1986, accounted for primarily by a tail-off in business with the older 3380 drives. This was partcularly damaging to IBM however, because the big disk drives are one of its most profitable products, and it is almost impossible for the company to turn in a good performance if they are doing badly. Also striking is the fact that software revenues for the rest of the world now outstrip those in the US, and are forecast to grow so dramatically this year. Maintenance and software are to IBM what beer and baccy have been to successive British Chancellors of the Exchequer, but IBM is beginning to run the risk of killing the goose with the miraculous laying powers by regularly slapping higher taxes on these two items whenever it has a cash flow hole that it wants to fill. And the regular price increases – way ahead of inflation – really are nothing more nor less than IBM taxes on a captive population. An indication that the maintenance numbers may not, after all, look so good this year as Geran expects comes with yesterday’s announcement that trouble-shooting time is not in future to be charged, at least in Europe (CI No 649). This move is clearly aimed at the proliferation of companies now offering third party maintenance services to IBM users – but the concession will inevitably cost IBM a not insubstantial amount of money. On the software side, by constantly hiking prices, IBM risks driving its users into the arms of the Unix vendors.

Year 1987E 1986 1985 US Foreign US Foreign US Foreign

Processors $5,100m $8,200m $5,499m $7,662m $5,794m $6,287m

Peripherals $5,300m $5,900m $5,573m $5,691m $7,307m $5,351m

Office systems $4,550m $5,000m $4,662m $4,600m $6,145m $4,406m

Maintenance $4,500m $4,100m $4,016m $3,397m $3,666m $2,437m

Software $3,135m $4,000m $2,367m $3,147m $2,176m $1,989m

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Other computer $1,100m $1,216m $1,064m $1,216m $1,301m $1,067m

Federal Systems $2,121m $2,121m $2,057m

Miscellaneous $65m $60m $8m $65m $8m

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