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April 13, 1987

WALL STREET SEES SIGNS OF RECOVERY IN DOUR IBM FIRST QUARTER FIGURES

By CBR Staff Writer

IBM yesterday unveiled first quarter figures that while dismal on most measures, were nevertheless better than some analysts had expected, with net profits down 23.5% at $780m on turnover up just 5.7% at $10,680m – although optimists will take comfort from the fact that sales were up 6.5% at $6,500m and the assumption that the poor profit performance represents a necessary front-end cost to the company’s strenuous efforts to reduce expenses. These should feed through strongly to the bottom line in the future. The profit figure would have been even worse but for the fadeaway dollar, which IBM estimates improved the overall turnover figure by $680m and net profits by $95m compared with what the would have been had the US currency remained at its year-ago level. The company is not breaking down maintenance and software as separate items, and reports that maintenance business grew 10.1% to $1,952m, while software revenues were up a storming 22.2% at $1,149m, reflecting the fact that IBM regularly increases software licence fees by between two and three times the amount needed to account for inflation. Rentals is now bundled in with other services, and still showed a decline – down 25.1% at $825m – rentals alone were $815m last year. The rate of growth of maintenance and software revenues has actually begun to slow: this time last year, the two combined, plus other services, were up 31.5%, this time, because the figures are drawn up differently, it is not possible to make a direct comparison, but clearly growth is now down around the 15% mark, half that of a year ago.

Encouraging signs

Commenting on the figures, chairman John Akers says although the worldwide economic situation remains unsettled, there are some encouraging signs in our business. In addition to the increase in first quarter shipments, we have announced new offerings in our large processor and personal computing product lines, and have moved forward availability of the mid-range 9370 system. We have yet to benefit fully from our recent product announcements, retirement incentives, and other resource-balancing measures, and we expect these actions will have a more significant impact as 1987 progresses. We also now expect more than 12,000 US employees to take advantage of the retirement incentive announced last year. In addition, we continus to take actions to make IBM more competitive, including cost and expense reduction measures. We have increased our commitment to customer partnerships, the cornerstone of IBM’s success. We remain optimistic about the prospects for both the industry and IBM, Akers said. Despite the lack of evidence of any substantial turnround either in the figures or in Akers’ accompanying upbeat but unspecific statement, Wall Street’s first reaction was that the figures indicated that the worst was over, and the shares were marked sharply higher – up $3.875 to $148.875 at 11.30am New York time, when the Dow Jones industrial average was off some nine points.

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