You don’t have to cast more than a cursory glance over IBM Corp’s first quarter figures (CI No 3,147) to realise that the analysts are either easily pleased or they were expecting the company to produce a far worse first quarter than most of us assumed they were. Oh yes, like the curate’s egg in the turn of the century Punch cartoon, the numbers were very good in parts. Trouble is that the good parts were either the soft ones that can be endlessly massaged to make the overall outturn look as rosy as possible, such as services, or they were in things like personal computers, where even in the best of times, each machine sold is only ever going to contribute a nickel or so after overheads to IBM’s bottom line – and even a million nickels adds up to only $50,000.
By Tim Palmer
The headline number looks cheery enough, first-quarter profits nine cents above analysts’ per-share forecasts, but that is where it ends. IBM has been furiously spending its cash buying in its shares and has 8% fewer out than it did a year ago – and last time it did that, in the late 1970s, within months it was rushing to the debt markets to raise vast sums of money to build new plants to wipe out most of the rest of the competition with its 4300 small mainframes, which turned out to be so devastatingly cheap that they wiped out all the more imprudent leasing companies and caused the crisis over residual values insured at Lloyd’s of London. One can certainly say that it is refreshing to find a management honest enough to admit that it is so bereft of ideas for the future of the company that it can’t find anything better to spend its cash on than its own shares – but that money is really coming out of a research and development budget that has been steadily shrinking for the past four or five years, and some people might call that eating the seedcorn – especially when IBM is hovering between the status of a low growth and a no growth company. The 54% jump in profits from 1996’s first quarter was flattered by a one-time charge in the year-earlier period that had depressed earnings, and without the charge, net profits were flat, leaving per share earnings up to match the 8% reduction in shares. Services may be highly fashionable (but such fads come and go with alarming rapidity), but margins ain’t so good as on even medium iron, let alone big – you have to share part of your hardware profit margin with the customer to win the business at all. So the overall gross profit margin dropped to 38.1% from 40.9%, and its results were flattered by a lower tax rate of 35.5% compared with 39% in 1996’s first quarter. On the down side was the strength of the dollar and the soggy European market – but the French and Germans are determined to keep the greenback right up there to make their own lives a mite less intolerable, so IBM will have to learn to live with it. It said currency translation reduced results by 19 cents a share in the first quarter, and if the dollar stays where it is, it won’t be a problem a year from now – provided IBM makes in Europe most of what it sells in Europe rather than importing it from a high currency area. Louis Gerstner, chairman and chief executive, said the mainframe product transitions hurt results, as did that continuing weakness in Europe, which depressed sales of the AS/400 in particular. However, he said hopefully, the excellent results from the fast-growth areas of our company more than offset the weakness in mainframes and AS/400s. Mainframe sales measured in MIPS rose a mere 6% in the quarter, and that is a big decline in revenues – it compare with 77% growth in MIPS shipped in the best quarter last year. Overall computer hardware sales were flat at $7.8bn and IBM sang its part in the chorus of woe over memory chip prices. RS/6000 as well as AS/400 sales were down, but IBM didn’t say by how much. Even software revenue fell 3% to $2.9bn – sell fewer mainframes, you get less of those monthly fees that are pure profit since most of the software has been paid for many times over. So to the good news – IB
M is making very good margins on the disks it makes and OEM sales continued to swell – according to finance chief Rick Thoman, disk sales almost doubled. He also reckons that in personal computers, IBM beat Compaq Computer Corp’s blow-out quarter in both unit sales and revenues. The other positive is those service contracts, with another $3bn booked during the quarter – which because of the way IBM accounts for them is just the kind of new business it needs every quarter to mask the effects of any earlier contracts going wrong – except that next year in will need to be about $3.5bn a quarter, and the year after, $4bn a quarter. Just how much longer do you expect the facilities management fad to last before there are some highly visible and contentious Year 2000 blow-ups, and some business school guru decrees that the only way to run these things cost-effectively is to bring them all in-house? Conservative accounting would take care of that – but then as IBM has so far done hardly any work on those new contracts yet, accounting conservatively, it would take a leaf out of Microsoft Corp’s book with its admirable policy of deferring growing amounts of revenue, and would not have taken any of that $3bn this quarter. But hey – who cares? Wall Street and Louis are happy, and Rick Thoman says We feel good about the full year – that’s all that matters.
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