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IBM's Earnings As Bad As Expected

Saying companies spent less on its computer equipment and services, technology giant IBM Corp. reported a 31 percent drop in first-quarter earnings, in line with the reduced expectations it laid out last week in a rare earnings warning.

IBM's earnings results were released after the markets closed Wednesday. Shares of IBM climbed $2.95, or 3.5 percent, to $87.76 in midday trading Thursday on the New York Stock Exchange.

The Armonk, N.Y.-based company on Wednesday said it earned $1.19 billion, or 68 cents a share in the quarter that ended March 31. In the year-ago quarter, IBM earned $1.75 billion, or 98 cents per share.

Revenue fell 12 percent to $18.6 billion from $21.0 billion a year earlier.

"Our first-quarter results, while disappointing, were largely the result of the continued weak global business environment," said IBM chief executive Samuel J. Palmisano, in his first earnings report after replacing the retiring Louis Gerstner. "As we indicated in our announcement last week, customers in every part of the world deferred technology purchases in the first quarter, and these widespread deferrals hurt us across every one of our major business segments."

Last Monday, IBM warned that it expected to earn about a billion dollars less than Wall Street expected, or just 66 cents to 70 cents a share for the quarter, far below the 85 cents a share expected by analysts surveyed by Thomson Financial/First Call.

Most of the company's earnings woes stem from weak sales of the powerful computer systems IBM sells to businesses and the components it sells to other computer makers.

A 37 percent slip in revenue in IBM's Technology Group, which manufactures hard disk drives and microprocessors, accounted for more than half of the overall drop in revenues, IBM chief financial officer John Joyce said in a conference call with analysts. The division lost $275 million, or 11 cents per share.

On Tuesday, IBM announced it would spin off its hard disk business — which accounted for about half the $275 million — in a joint venture with Japanese electronics maker Hitachi Ltd.

IBM's revenues from sales of personal and corporate computer systems dropped by 21 percent, with software sales slipping by 1 percent.

Services revenue also suffered. Despite signing more than $15 billion in services contracts, up 50 percent over last year's corresponding quarter, revenues from the company's enormous Global Services division declined by 3 percent, to $8.2 billion.

Global Services, which counts for almost half of IBM's 330,000 employees, accounted for 44 percent of the company's revenue in the quarter.

IBM blamed many of its earnings woes on an economic slowdown that has weakened the entire industry, with IBM hurt less than most other technology companies.

Big Blue's sales of enterprise computers, like mainframes and storage servers, were hurt by corporate customers' cutbacks on information technology spending.

With a decline in computer systems sold, fewer companies needed to hire IBM's systems integrators to help set up computer networks.

"The IT industry is always hit hard during economic downturns," Joyce said. "We've just come through probably the toughest two or three quarters in the IT industry in a decade."

Despite the rough environment and disappointing performance, Palmisano was upbeat about the coming year, noting that several of the company's products gained market share, even as sales dropped.

"While no one can predict the timing of a recovery, we remain optimistic that business conditions will improve later this year," Palmisano said.

Terms of IBM's deal with Hitachi were not disclosed. But Hitachi is expected to have a 70 percent stake in the new company.

Analysts speculated that Hitachi would gain full ownership of the company within three years, paying IBM for the acquisition of its business, the world's number three hard disk maker. One analyst valued IBM's hard disk division at between $2 billion to $4 billion.

The joint venture, which is subject to regulatory approval, would be based in IBM's disk development and engineering offices in San Jose, Calif.

By Jim Krane

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