IBM Jolts Wall Street
Technology colossus IBM Corp. jolted Wall Street on Monday, warning investors that its first quarter earnings would come in well below analysts' expectations.
Investors responded by dumping its shares. In trading on the New York Stock Exchange, IBM shares dropped $9.84, or 10.1 percent, to $87.41 a share.
IBM chief financial officer John Joyce blamed the warning on a "very tough" business environment, exacerbated by the traditionally weak first-quarter technology sales.
"We saw a continued slowdown in customer buying decisions in the first quarter," Joyce said.
Many IBM "customers chose to reduce or defer capital spending decisions until they see a sustained improvement in their businesses," Joyce said.
IBM said it expects to earn 66 cents to 70 cents per share for the quarter, which ended March 31, compared to the 85 cents per share expected by analysts surveyed by Thomson Financial/First Call.
IBM earned 98 cents per share in the first quarter of 2001.
The quarter's revenues are expected to be in the range of $18.4 billion to $18.6 billion compared with $21.0 billion in the first quarter of last year, IBM reported. Analysts had been looking for IBM revenue of $19.65 billion in the first quarter.
Joyce said IBM's Technology Group, which makes semiconductors and storage drives sold to computer makers, will be particularly hard-hit. He said he expected the division to lose $200 million in the first quarter, amid revenue declines of around 35 percent.
IBM expects to report its first-quarter earnings on April 17.
At Merrill Lynch, analyst Steven Milunovich said IBM's revenue shortfalls must extend beyond those Joyce mentioned, if they were to account for such drastic cuts in expected earnings.
Milunovich guessed that revenue earned by IBM's services, hardware and software divisions might also suffer.
"There's plenty of evidence that enterprise spending will be weak until corporate profits improve," Milunovich said.
Milunovich wondered whether IBM's warning stemmed from a more cautious attitude about earnings forecasts by new chief executive Samuel Palmisano.
"It is not clear to us as to whether the business is getting that much worse or this announcement reflects the inclinations of the new CEO," Milunovich wrote. "Given increased accounting scrutiny, IBM's proclivity to stretch to make earnings on disappointing revenue was becoming a liability."
Palmisano took over for retired chief executive Louis Gerstner on March 1. Gerstner remains the company's chairman.
Another analyst noted that the departing Gerstner sold millions of his own IBM shares over the past two years, reaping hundreds of millions in proceeds.
"When (Gerstner) was introducing Palmisano as the new CEO, he was lauding the company and its strategy, but at the same time his actions indicated he didn't have any faith in it," said Bob Djurdjevic of Phoenix's Annex Research, a perennial IBM critic. "When you look at what he does, rather than what he says, you see that the best days of IBM are behind us."
Gary Helmig, an analyst with SoundView Technology Partners, said IBM continued to gain market share in servers, storage devices and software despite the bad news.
"It's a general slowdown in demand for a company that's continuing to gain share," Helmig said.
Meanwhile, UBS Warburg analyst Don Young issued a glowing report that emerged just minutes before IBM's earnings warning.
On the basis of its strides in the market for computer network servers, Young termed IBM stock a "strong buy." Since October, Young has issued reports guessing that IBM's stock would rise to a target of $140 per share.
Later in the day, Young said he was keeping the "strong buy" rating on IBM stock despite the company's lower earnings and revenue announcement. But he reduced the price target to $120 a share.
"We continue to believe IBM is fundamentally sound and is well positioned to gain share in enterprise computing and reverse the trend of losing share," he wrote.
On Friday, the company laid off 600 workers in its massive Global Services division.
In January, IBM signed a three-year, $5 billion outsourcing agreement with Sanmina-SCI Corp., an electronics manufacturer, to assemble IBM desktop computers and save costs. The contract included a transfer of 900 IBM employees to Sanmina.