IBM Posts Record First-Quarter Earnings - InformationWeek

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IBM Posts Record First-Quarter Earnings

IBM's first-quarter financial performance was a record, stirring financial analysts on yesterday's earnings teleconference to describe the results as "spectacular" and "super." But because the first quarter is traditionally IBM's slowest quarter of the year, the analysts fretted over whether they should increase projections for the rest of the year, or expect a collapse.

IBM posted net income of $1.5 billion for the quarter, up a whopping 42% compared with $1 billion for the first quarter a year ago, and revenue was up 15% from a year ago to $20.3 billion.

Why such good numbers? Business improved in Asia, noted IBM CEO Lou Gerstner, and there was double-digit revenue growth in Europe and the Americas. Software and services contributed 60% of the profits for the quarter, with software revenue up 10% over a year ago, and services (excluding maintenance) up 24%, with $9.8 billion in new business signed during the quarter. Total hardware sales were up 17% from a year ago to more than $9 billion. Growth in hard-disk sales was offset by continued weakness in memory chips.

The real shocker, though, was PC sales, up 50% to $3.6 billion for the quarter compared with a year ago. "We anticipate that industry analysts will report we gained market share across all brands," says Doug Maine, IBM's CFO.

IBM's strategy, Maine adds, is to be "first to market with leading technology that is competitively priced." In addition, he says, two-thirds of the PC profit opportunity is from the other products and services sold with PCs, and prices are up because inventories in the channel are leaner. Also, Maine reports, sales of IBM's mobile computing and Netfinity products were up even more than PC sales. There are 50,000 people worldwide that sell Netfinity servers, he notes, adding that IBM believes half of all PC customers are moving toward buying directly from manufacturers. IBM plans to step up PC sales over the Web this year, particularly to small and medium businesses.

AS/400 and RS/6000 sales were down, partly because of new model introductions and announcements, but System/390 sales were up more than 80% in terms of Mips (millions of instructions per second) shipped. A large percentage of the S/390 sales were driven by new applications, Maine adds, particularly E-business, ERP, and data mining applications.

Maine cautioned analysts to take the rest of the year "one step at a time," rather than raise projections or fear a collapse, because of the uncertainty created by the year 2000 computer problem. Wall Street is generally nervous about information-technology sales in the second half of this year, reasoning that sales will slow as companies halt changes to their systems to avoid deterioration in year 2000 compliance of the systems.

"There is an absence of anything we are hearing from customers that suggests a slowdown of spending" in the second half of the year, says Maine, who remains confident in projections of a 9% growth rate for the IT industry this year. But the impact of the year 2000 is uncertain, he warns.

IBM is spending $575 million on its own year 2000 project and is "virtually complete with remediation," Maine says.

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