As traders wielded red pencils viciously over the figures against IBM Corp’s name yesterday, it appeared that the company’s decision to announce its results overnight had backfired with a vengeance. After a 25- minute delay for an order inbalance, the shares started trading off a whopping $14.75 at $155 – and that kind of fall is good (or bad) for a 68 point slump in the Dow Jones Industrial Index at 6,816. The massacre in the IBM share price – not really so dramatic given that it was revisiting price levels seen as recently as earlier this month – underlined the vulnerability of share prices to any real news in this vastly overheated market. IBM’s shares later recovered to $157.875, and the fig ures weren’t that bad, unless you are one of those that buy into the theory that all the bad times are over for IBM and that it is sunny uplands from here on in.
By Tim Palmer
To do so of course requires the assumption that the company has resolved the problem that revenues from its quite phenomenally profitable mainframe software business are set to start dwindling really fast by the turn of the century, that it can keep up with Compaq Computer Corp in its personal computer business, and that it has found the answer to the fact that major customers are beginning to wonder whether facilities management is really such a good idea as they thought – a perception that threatens its great hope for the future, the fast-growing services business. And then of course there are the seas onal factors, such as the fact that Europe seems determined to sink back into recession, and that the strength of the dollar lopped 18 cents a share off fourth quarter figures compared to where they would have been if the dollar had remained at the low level of a year ago. The company reported fourth quarter net profit up 18% at $2.02bn or $3.93 a share against a First Call consensus of $3.88, but the figure was shy of the whisper number and sales did not advance as expected – they were up only 5.6% at $23.14bn. The company attributed what were still better- than-forecast earnings to strong growth in its services unit, a contin ued turnaround in its personal computer operation, lower expenses and an improved tax rate. But the mainframe business was a drag, the chip business, where 1996 marked the year when the PowerPC strategy collapsed into complete disarray, failed to perform, and Europe was a drag. The results are OK but not aggressively OK, said Jay Stevens of Dean Witter Reynolds. Most people would have liked better revenue growth. Shao Wang of Smith Barney said hardware revenue growth was particularly disappointing. Dan Mandresh of Merrill Lynch & Co, a legendary IBM bull, confessed that he was reviewing his earnings projections for possible reductions. The improved profit was in large part down to a tax rate that fell to 29.9% in the quarter from 33.4% a year earlier. Chief financial officer Richard Thoman said the lower tax rate came primarily from moving to full production at new plants in Thailand, Singapore and other low-tax regions. He added that IBM also had a substantial one-time tax deduction in Brazil – in other words, the tax benefits are not all going to last. The slump in mainframe business is underlined by the fact that although the personal business advanced, the AS/400 had a strong quarter, and sales of the RS/6000 workstations and servers were flat, overall hardware sales rose only 1.7% to $11.7bn.
It is shocking that in the one area where the PowerPC does appear to have a future, the RS/6000 line, sales were only flat. Computer services continued to grow, adding 22% to $5bn, and the Global Services operation signed about $6bn in new business in the quarter – but that is the easy part: the hard work and the problems usually start appearing two or three years down the road. Software revenue rose 3.9% to $3.718bn and a record 1.5 million copies of its Notes were shipped in the quarter. Maintenance revenue dropped 6% to $1.7bn. The overall gross profit margin declined to 40.3% in the quarter from 41.7% a year earlier. Expenses fell 2% from the 1995 quarter. For the year, IBM was 30% ahead at $5.43bn, $10.24 a share, on revenue 5.6% ahead at $75.95bn. Thoman was optimistic about 1997, saying We face very strong demand for almost all our products, but warned that IBM will continue to be hit by weak memory chip prices and that currency fluctuations remain a wild card. He also complained that IBM could not get enough employees in Europe to accept voluntary severance, so its fourth quarter restructuring expenses were $200m. Analysts were unconvinced and were busy lowering their estimates for the company for the current quarter and the fiscal year.