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4/15/2005
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IBM's Tepid Quarter Will Bring Restructuring

A restructuring at IBM in the wake of the company's disappointing first quarter could include cuts in services employees and organizational changes. The company's revenue grew just 1%, excluding currency-related gains during the period, and its per-share earnings of 85 cents fell short of Wall Street expectations of 90 cents.

The lackluster performance led CFO Mark Loughridge to concede during a conference call last week that "some sizable restructuring activities" are pending. Details of the changes will come in the next three months and will be "primarily designed to move decision making closer to the customer," he said. Yet analysts and insiders already are speculating about job cuts.

Including currency gains, IBM's revenue grew 3.3% to $22.9 billion for the three months ended March 31. Net income rose 2.9% to $1.4 billion.

Although the quarter didn't meet Wall Street analysts' expectations, it was hardly disastrous. Still, the numbers reveal some worrisome signs. The company's vital services arm saw a year-over-year sales increase of just 3%, excluding currency gains. "There's definitely some execution issues there," Caris & Co. analyst Mark Stahlman says. IBM saw a significant drop in small services transactions near the end of the quarter and had a hard time closing sales. "We always have deals that don't close, but more than the normal level slipped this quarter," Loughridge said.

As a result, IBM may be poised to shake up its services business. The company could be planning staff cuts of up to 10% within its U.S. services arm, says Lee Conrad, who heads Alliance At IBM, an employee group connected to the Communications Workers of America union. "We've been getting reports from our members that cuts of that level are in the wind," he says. An IBM spokesman calls the claim "speculative fabrication."

German media reports say the company is planning to cut as many as 2,500 jobs in Western Europe and move work to lower-cost facilities in Eastern Europe. Management changes may also be coming within IBM Global Services, analyst Stahlman says. "Based on the way [CEO Sam] Palmisano tends to approach these situations, I wouldn't be surprised if he replaces some senior management," Stahlman says. John Joyce, the company's former CFO, heads IBM Global Services.

Beyond services, IBM saw mixed results in other parts of its business. Excluding currency gains, revenue from hardware fell 2% year over year to $6.7 billion. Within that, sales of Unix-based pSeries systems were strong, increasing 12%. That was offset by an 11% drop in sales of mainframe computing power.

Total software revenue was flat at $3.6 billion. Middleware sales increased 3% to $2.8 billion. Sales of IBM's DB2 database software were particularly strong, growing 9%, while sales of its Tivoli infrastructure-management software climbed 15%. Operating revenue decreased 2% to $590 million.

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