InformationWeek

Major Industry Players Post Healthy Numbers

Microsoft, Compaq, and IBM report amid turmoil in tech stocks

By Mary Hayes
Issue date: July 29, 1996

Solid financial reports from Microsoft, Compaq, and IBM last week indicate the computer industry is in good health, analysts say, even though technology stocks continued to fluctuate wildly.

On July 23, Microsoft reported net income of $559 million, up 52%, for its fiscal fourth quarter, ended June 30. The following day, Compaq posted a 9% increase in second-quar ter profit to $267 million. On July 25, IBM stepped up to report $1.3 billion in second-quarter earnings. That was down 22% from the previous quarter, but in an optimistic analysis, the company blamed the decline on short-term factors.

Although the results from all three companies exceeded analysts' projections, Microsoft's numbers appeared to trigger a sharp decline in its stock price, leading the entire technology sector down. The next day, tech stocks, including Microsoft, reversed course and proceeded to rally in reaction to the numbers from Compaq and then IBM. But on July 25, the technology-heavy Nasdaq index closed below where it had been before the string of financial reports.

"Microsoft had great earnings numbers; they were just a bit unfortunate in the timing," says Rick Sherlund, an analyst with Goldman, Sachs & Co. "The market is emotional sometimes." Microsoft says sales of operating systems alone amounted to $4 billion in fiscal 1996. Windows NT Workstation and NT Server together wit h the BackOffice server suite products now constitute a $1 billion-a-year business for Microsoft, says Mike Brown, the company's chief financial officer. Brown adds, however, that the forthcoming Windows NT 4.0 isn't expected to generate the same spectacular out-of-the-box sales as Windows 95 did. But Microsoft expects its Internet products to become "major revenue producers" in the second half of fiscal 1997.

Prolinea Boosts Compaq
Compaq says its line of Pentium Pro-based Prolinea 5000 servers, which it introduced in June, helped drive up server sales in the second quarter over the first quarter. In addition, price cuts on products didn't seem to hamper the company's profit margins. "We returned our gross margins to 23%, which is more of our target model," says VP and corporate controller David Schempf.

IBM blamed its lower earnings on a sharp drop in memory prices as well as unfavorable currency exchange rates. But the company cited strength in its AS/400 line, Unix processors, System/3 90 products, PCs, and services. "Some say we're overinvesting in the mainframe business, but it's still profitable," says IBM chief financial officer G. Richard Thoman.

IBM says its long-term strategies are working. "We said we were going to have a difficult second quarter," Thoman says. "We expect a more positive second half."

With additional reporting by Stuart J. Johnston and Martin J. Garvey

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