IBM profits up fivefold, but analysts are disappointed

July 18, 1992|By New York Times News Service

IBM reported yesterday a fivefold jump in profits for the second quarter, but its stock price dropped more than 5 percent in heavy trading because the earnings were below the estimates of many analysts.

International Business Machines Corp., the world's largest computer company, is in the midst of an ambitious program, announced late last year, to cut costs and improve profitability.

Steve Milunovich, an analyst for Morgan Stanley & Co., said the second-quarter results showed that "IBM is on the comeback trail, but it's going to be an arduous journey."

Investors showed their disappointment by driving IBM shares down $5.25 each, to $95. It was the most heavily traded issue, by far, on the New York Stock Exchange.

IBM reported second-quarter net income of $714 million, or $1.25 a share, up sharply from net income of $126 million, or 22 cents a share, in the same quarter of 1991.

The gains were attributed to lower costs and higher revenues, especially from a new line of mainframe computers, software and services.

The reported earnings of $1.25 a share compared with a consensus estimate of $1.33 a share among the analysts' projections tracked by First Call Corp., a subsidiary of Thomson Financial Services.

Worldwide revenue for the quarter rose 9.9 percent, to $16.22 billion from $14.76 billion in the period a year earlier. The revenue growth for the quarter was higher than most analysts had expected.

Revenue from services such as providing custom computer operations for offices and factories jumped 46 percent, to $1.86 billion. Sales of computer software increased 12.3 percent, to $2.68 billion.

The strong growth in software and services was in line with IBM's goal of emphasizing those businesses, especially as price competition in hardware products from mainframes to personal computers becomes more intense.

The slippage in IBM's gross margin, a key measure of profitability, during the second quarter disappointed some analysts. "The revenues were stronger than expected, but the pressure on its gross margin is what brought the earnings in a bit below expectations," said Jay Stevens of Dean Witter Reynolds.

A company's gross margin is typically defined as revenue minus the direct cost of manufacturing products or providing services, expressed as a percentage of total revenues.

Analysts figured IBM's gross margins at 48.6 percent in the second quarter, or 2.2 percent lower than in the first quarter.

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