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January 19, 1988

WALL STREET GIVES IBM’s 50% FOURTH QUARTER PROFIT HIKE THE THUMBS DOWN

By CBR Staff Writer

IBM triumphantly achieved its prime objective of reporting profits for 1987 substantially ahead of those for 1986 with fourth quarter net 50.2% ahead of the dismal figure this time last year (see Company Results). But the big question is how the advance was achieved – how much of the growth was at the expense of what promises to be a rotten first quarter 1988? It is also clear that a reduced tax rate was a major contributor to the improved figure at the net level – while net profits for the year were 9.8% ahead, at the pre-tax level, profits rose only 2.6% to $8,609m. Per share earnings grew significantly more than net profit because of IBM’s agressive buying in of its own shares. The tax rate was even lower than analysts expected – Daniel Benton at Goldman Sachs reckons it was about 36.4% for the quarter where he had been looking for 41% against 45% in the 1986 fourth quarter. Underlining that the superficial goodness of the figures fooled nobody, the Dow Jones Industrial Average fell 22 points in early trading yesterday in response to the IBM announcement, and IBM’s own shares fell $2.625 to $115.125 on the figures. Chairman John Akers did little to counteract the mood, saying in his statement that IBM remained concerned about the uncertainties in the worldwide economy as we move into 1988, but was nevertheless planning for growth. We continue to invest for the long term, and we remain confident about the future of our industry and IBM..

He declared that the results demonstrate that our continuing efforts to make IBM more competitive are beginning to pay off. We have lowered our cost of doing business with our expense actions, cost improvements and work force reductions and continue to make investments and organisational adjustments aimed at sharpening our competitiveness. In the last two years, we have reduced our overall work force by 16,000 and redeployed 21,000 employees, with more than half of them moving into field positions to work directly with our customers. But the worries remain. Sales in the third quarter rose 9.2%, but in the fourth quarter they were up only 5.2% to $12,901m. Maintenance services, where prices are regularly hiked well ahead of inflation, indicate the pressure of third party competition, growing only 0.6% in the fourth quarter to $1,927m. Program products soared 28.6% to $2,283m, still only 12.7% of the total, and rentals and other services again declined, off 9.4% at $900m. In the year, outright sales rose 6.0% to $36,345m, underlining the slackening in the fourth quarter. Maintenance rose 3.7% to $7,413m, program products – software – rose 23.9% to $6,836m, 12.6% of the total, and rentals and other services fell 17.3% to $3,345m, leaving little for anyone to cheer about.

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