IBM profits plunge, but Wall Street shrugs Big Blue had said to expect big drop

October 16, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- It was a brutal third quarter for IBM, but no worse than expected.

Battered by the recession, increasingly aggressive competition and draining product transitions, International Business Machines Corp. reported yesterday that third-quarter profits plunged 85 percent from a year ago.

The news came as no shock to the financial markets because the company had long ago prepared Wall Street for bad news. Its per-share earnings figure of 30 cents was within pennies of the consensus expectation of securities analysts and far better than worst-case scenarios forecast by some. In active trading, -- the company's share price rose $3, to $104.25.

IBM said yesterday that its work force of 373,816 as of the close of 1990 would drop by 20,000 people this year. About one-fifth of the reduction stemmed from the sale of the company's PTC typewriter and printer division. Of the rest, a company spokesman said, the "overwhelming majority" elected to take early retirement.

The company had earlier announced that at least 17,000 employees would leave during 1991, while suggesting that several thousand more would lose their jobs. Yesterday's announcement confirmed that hint. Although IBM contends it has never laid off people, the company has reportedly instituted new, more stringent employment standards that have resulted in performance-related firings.

As of the end of last year, IBM had about 9,500 employees at more than a dozen Maryland facilities.

"The bottom line wasn't a shock, and when you dug underneath all the other numbers, the other results weren't a shock either," said Rick Martin of Prudential Securities. "We knew revenues were under pressure, and they were. We knew margins would be under pressure, and they were, and we knew expenses would come down, and they did."

Added William Milton Jr. of Brown Brothers Harriman & Co.: "There was absolutely nothing surprising."

Net income for the quarter was $172 million, compared with $1.1 billion during last year's third quarter. Revenues for the period fell 5.5 percent, to $14.3 billion. While both numbers were poor, they reflected smaller declines than had been registered during the second quarter, and many analysts suggested yesterday's results were a cyclical low point for the company.

"It would be hard to imagine another year as bad as this," said Mr. Milton.

Mr. Martin called the results "poor but not disappointing."

"If you look ahead at the economy turning and at the company's new mainframes shipping in volume, it's pretty easy to predict IBM will have a fairly significant turn in earnings fairly soon," he said.

IBM is the first of the large computer-makers to report third-quarter earnings. Other major companies are expected to post similarly poor results. "Of the majors, you would be very hard-pressed to find anyone doing well," Mr. Martin said. "It's just a matter of who is doing terribly, and who is doing less terribly."

Still, despite the abundance of bleak results, earnings for IBM and the two major computer-chip producers, Intel and Motorola, which both reported last week, were not as bad as had been feared. In a 90-minute conference call with approximately 150 securities analysts yesterday morning, IBM executives were said have suggested that economic conditions were stabilizing in the UnitedStates, France, Britain and Italy but slowing in Germany and Japan.

IBM's sales have been hobbled recently by a transition from older products to new-generation technology in its core mainframe market.

IBM recently unveiled a number of important new products, including a critical new family of mainframe computers, the ES/9000. The ES/9000 is believed to have been well-received by customers, but sales of older products slowed as customers awaited its introduction.

"Mainframe purchases are extremely sensitive to the product cycle," said Prudential's Mr. Martin. "They introduce a new generation every five to 5 1/2 years, and, unfortunately, the transition came at the same time as the recession."

However, the consensus of analysts is that the product rollout is going well. "We are encouraged by demand for our recently announced products," IBM Chief Executive John Akers said. "We expect improvement in the pace of our business as shipments of our new product line build."

The quarter's results also suggested a stringent cost-control program had been successful.

The computer industry, however, remains extremely competitive, and much of the current optimism is for a rebound from current results, not a broad rejuvenation.

"They have a lot of work to do before people suggest their problems are over," said Gerald Malone, an analyst at TIAA-CREF, a major institutional shareholder.

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