IBM's 1Q results display new strengths

Electronic News, April 28, 1997 by Carol Haber

The company cited explosive growth in its services business, a strong PC company performance, and stamina in storage. On the other hand, servers sagged, and IBM suffered yet another bruising blow from DRAMs--albeit stating that major damage from that commodity product was "largely over."

The company reported 1Q97 net earnings of $1.2 billion, or $2.37 per common share, flat with $1.2 billion, or $2.21 per common share, in 1Q96, excluding a charge in the year-ago figures tied to acquisitions. A negative currency impact, due to the stronger dollar, cut per-share earnings by 19 cents.

Revenues for the quarter ended March 31, 1997 rose 5 percent to $17.3 billion from the same quarter in 1996 but climbed 9 percent when calculated on a constant-currency basis.

Shares of the company went on a spree in subsequent days, with an 11-point-plus gain last Thursday alone, the day after the report.

Hot markets for the company in the quarter were said to be Asia/Pacific and North America, while Europe slumped.

DRAM Damage

At a phone conference with financial analysts, CFO Richard Thoman said that the company continued to take "a very big hit" on DRAMs, impacting hardware margins. "We had a tough first quarter because of this...The DRAM price decline hit us hard in terms of earnings in FY96 and continued to do so in 1Q97 of this year. It will be with us a little this quarter and a little next quarter, but it is largely behind us."

Asked whether the company was close to turning the DRAM problem around, Mr. Thoman answered quickly: "No," explaining that IBM's DRAM product was a commodity item. The strategy is to make the price-volatile product a lesser part of the mix.

The CFO also told analysts that gross profit margins would continue to decline due to a changing product mix, at about a point or so a year. Offsetting factors are expected to include improving expense-to-revenue ratios and tax rates.

Mr. Thoman compared IBM's PC business to Compaq. "Both unit and revenue growth exceeded Compaq's in the first quarter by a good margin," he said. "Within that, consumer growth slowed, desktop was strong, and mobile truly extraordinary." Total PC business grew faster than Compaq in North America and Asia, but Compaq excelled in Europe. Mr. Thoman said IBM is optimistic on the PC business for the second half but comparisons are expected to be "more difficult" than those in the first half.

"Europe remained at the relatively slow rate of growth we have seen over the past several years. We have to energize our organization to make sure we are performing in the best possible manner in a difficult market," Mr. Thoman commented.

Currency Challenge

"Currency continues to make relatively strong negative moves since last year," Mr. Thoman said. "If you assume the dollar will remain at the current level, the impact of currency will remain signficant but perhaps falling off in the later stages of the year."

In a prepared statement, CEO Louis V. Gerstner Jr. said: "We continued to see strong performance in the first quarter in fast-growth areas including services, personal computers and certain distributed software such as Lotus Notes and Tivoli systems management products. I'm also pleased by the strength of our storage business.

"As we expected, our server business was adversely affected by product transitions, most notably within our System/390 division, and by ongoing weakness in Europe, which hurt our AS/400 sales. However, the excellent results from the fast-growth areas of our company more than offset the weakness from our server line...."

On an as-reported basis, 1Q97 revenues in North America were $7.9 billion, up 14 percent from the same period a year ago. Asia/Pacific revenues increased 3 percent to $3.4 billion while revenues from Latin America rose 2 percent to $701 million. Revenues from Europe/Middle East/Africa declined 7 percent to $5.3 billion. On a constant-currency basis, Asia/Pacific revenues grew 14 percent and Europe/Middle East/Africa revenues grew 1 percent.

Hardware sales totaled $7.8 billion in 1Q97, essentially flat compared with the same period last year. Personal computer and PC server revenues increased, while RS/6000, AS/400, and System/390 revenues declined. Revenue from the company's storage business increased, due in part to continued strong sales of hard disk drive (HDD) products.

Services Shine

Services revenues climbed to $4.1 billion, a 28 percent gain from the same quarter last year. On a constant-currency basis, services revenues grew 34 percent, while hardware revenues grew 5 percent and software revenues grew 2 percent.

Total gross profit margin slipped to 38.1 percent in 1Q97 from 40.9 percent in 1Q96.

In describing a changing product portfolio, Mr. Thoman listed the following: services business has grown to 24 percent of revenues from 15 percent a few years ago; hardware is only 45 percent of revenues, down from 50 percent in 1994, and within hardware, servers represent collectively only 11 percent of revenues in 1Q97, down from 17 percent in 1994.