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October 18, 1995


By CBR Staff Writer

IBM Corp is back in the red again for the third quarter after the hit it warned it would have to take on the Lotus Development Corp acquisition, and it will have to take another $880m hit for further lay-offs and plant consolidations in the current quarter. Disconcertingly, this means that the company has already used up $2,300m that remained to be used at the end of last year from the $8,900m charge taken in 1993. The company made a net loss of $543m for the third quarter, after the $1,800m charge on the acquisition of Lotus Development Corp. Excluding the charge, IBM made a net profit of $1,300m or $2.30 a share, against a profit of $710m or 1.18 a year ago. The $2.30 compares with analysts’ mean estimates of $2.42 a share. Total revenues were $16,800m in the quarter, up 9%, but Our hardware sales were disappointing in the third quarter, largely due to supply imbalances in System/390 servers and high-end storage products, chairman and chief executive Louis Gerstner said.

Supply imbalances

Supply imbalances means in the case of the disks and the tapes that they don’t work yet, and in the case of the mainframes, they did not order enough power supplies. Including the Lotus purchase, IBM lost 96 cents a share for the quarter, and the market’s disappointment was shown with a pre-opening fall of $2.25 to $91.50, although they recovered to $92.25 once official trading began. Hardware sales were essentially flat in the quarter, at $7,800m but revenues in all regions were up. RS/6000 workstation and storage product revenues were up on the year-ago period, and personal computer sales also increased – the wording suggests that the advance in personal computers was very limited. The AS/400 revenues declined due to a product transition to new models, expected this quarter. Mainframe revenues fell as a result of ongoing price cuts and the supply shortages. IBM’s software sales continued to show solid growth and services and revenues from OEM products continued strongly, the company said. Lotus Notes users also increased significantly in the quarter, and it was also an excellent quarter for Lotus’s cc:Mail electronic mail software. The company completed the quarter with about $7,000m in cash. Revenues from North America were $7,200m, up 9% on the year ago figure, and revenues from Europe, the Middle East and Africa were $5,600m, up 6%; Asia-Pacific revenues were the stars, up 14% at $3,300m, while Latin America was in line with North America, up 9% at $725m. Currency unexpectedly had a favourable impact of some three percentage points – but that compares with six points in the first quarter, seven points in the second. Overall software revenues were $3,100m, an increase of 14% on the year-ago quarter, while the low-margin services business grew 36% to $3,100m. Maintenance revenues increased 2% to $1,900m but must start to fall as the CMOS mainframes proliferate. Revenues from rentals and financing grew 11% to $893m. The total gross profit margin was 41.3% in the third quarter compared with 39.9% a year earlier and 42.4% and 43.5% in the first two quarters of 1995, respectively. IBM and an independent valuation firm together arrived at the charge on the Lotus acquisition after estimating the value of the technology purchased. Of it, $1,800m did not meet accounting definitions of completed technology, and thus should be written off under accounting rules. Total expenses, excluding the Lotus charge, declined by 2% in the third quarter.

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