IBM's earnings jump 65% Big 4th quarter sends stock up $8.625

January 19, 1996|By BLOOMBERG BUSINESS NEWS

ARMONK, N.Y. -- International Business Machines Corp. posted a 65 percent surge in fourth-quarter earnings, capping the second year of profitability under Chairman Louis Gerstner.

Profit from operations at the world's largest computer maker rose to $2.03 billion, or $3.66 a share, from net income of $1.23 billion, or $2.06 a share, in the year-earlier period. Analysts expected per-share earnings of $3.53, according to Zacks Investment Research.

More important, IBM had strong results in many businesses -- personal computers, software, services and servers -- accounting for 57 percent of total sales last year, up from 52 percent in 1994. These units are critical as IBM moves away from its stagnating mainframe operations.

"Our fundamental strategies are working," said Mr. Gerstner, who is credited as the architect of IBM's recovery. "We are focused on two things: completely transforming our traditional businesses to position them for the emerging network-centric computer market and rapidly expanding our newer high-growth businesses."

"IBM is a growth story again," said Roxane Googin, an analyst at Gruntal & Co. "Gerstner has really re-engineered the company, and you're starting to see the fruits."

On the New York Stock Exchange, IBM's stock rose $8.625, to $96.25, on volume of 9,795,500 shares.

IBM's shares hit a low of $41 in August 1993, shortly after the company posted a second-quarter loss of $8 billion, the second-largest loss in U.S. corporate history.

"We are beginning to see the benefit of all the improvements in our business," said Rick Thoman, IBM's chief financial officer. "Our breadth is paying off."

Revenue rose 10 percent to $21.9 billion from $19.9 billion in the year-ago period. Currency gains contributed about 2 percentage points to the rise in sales.

Gross margin widened to 41.9 percent from 40.6 percent a year ago. Gross margin is the percentage of sales remaining after the costs of manufacturing are subtracted.

Lotus Notes shipped 1.2 million copies. The document-sharing software has shipped more copies in the last six months than in the product's previous six-year history, Mr. Gerstner said. IBM bought Lotus Development Corp. for $3.52 billion last July.

The recent period included a pretax charge of $663 million to cover costs of cutting workers and a pretax gain of $175 million, resulting in net income of $1.71 billion, or $3.09 a share.

"It was a good quarter. Earnings were better than expected, and revenue was up," said analyst Steve Dube of Wasserstein Perella Securities. He said investors were relieved that IBM's results exceeded expectations -- after disappointing earnings from other technology companies, such as Intel Corp. pummeled those stocks -- and the overall market.

IBM is trying to make a transition from reliance on mainframe computers, which contribute as much as two-thirds of its profit, to networked systems that include servers, PCs and collaborative software. That transition is necessary. IBM lost nearly $16 billion between 1991 and 1993 as prices for mainframes plummeted.

Mr. Gerstner, who took the helm at IBM in 1993, slashed costs by $8 billion and cut more than 65,000 jobs to return IBM to profitability. He said the 1995 revenue increase was the best rate of increase since 1984.

Services revenue rose 25 percent, surpassing software as IBM's second-largest business, behind hardware. Services revenue rose to $4.09 billion from $3.28 billion. Software sales rose 9 percent to $3.58 billion from $3.28 billion.

PC sales did particularly well, Mr. Thoman said, noting that the corporate market is more important to IBM because of the higher profitability. "While there is a lot of hype about the consumer market, we are seeing strong demand from our corporate customers," he said.

Hardware sales rose 12 percent, slightly less than expected, to $11.5 billion from $10.6 billion. Product delays contributed nearly $400 million in sales that would have normally come in the third quarter, analysts said.

Analysts had expected hardware sales to rise as much as 18 percent to $12.5 billion.

IBM spent about $1.6 billion in the fourth quarter to buy back its stock. In 1995, IBM spent $4.9 billion to buy back shares, and the company is authorized to buy back as much as $7.5 billion.

IBM may spend $1 billion more this year on capital expenditures as it looks to maximize return on its available $7 billion in cash, and will look at acquisitions, including small services companies and software makers that complement its offerings.

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