Despite low-end PC hit, IBM beats 2Q estimates

Electronic News, Oct 27, 1997 by Carol Haber

Armonk, N.Y.--Beating Wall Street estimates--but ambushed by the speed of the low-end shift in the consumer PC market--IBM is focused on the PC situation "like a trout on a fly." So said Senior VP/CFO/General Counsel Larry Ricciardi to financial analysts at a phone session to discuss the company's third quarter financial results.

Amid the slew of disappointing earnings results this quarter, IBM's performance buoyed investors, which beat analyst expectations by a cent or two per share. Shares of Big Blue jumped from 97- 1/2 to 105-1/8 midweek--before the Hong Kong debacle; by presstime Friday, IBM shares were back to 97-3/8.

The company surpassed Wall Street's expectations "despite some pretty tough blows from currency, continuous resource rebalancing, economic conditions in Europe and parts of Asia, demand shifts in hard disk drives and consumer PCs, and the never-ending price pressure everywhere in the technology sector," said Mr. Ricciardi to analysts.

Currency effects damaged earnings by 14 cents per share and revenues by about five cents. IBM said it would continue to feel the negative impact of currency in the all-important fourth quarter, but at a reduced rate.

The PC factor surfaced at retail. The company had flooded retail channels with middle-range Aptiva's, "which seemed the most attractive financially and the most logical extension into the consumer arena from IBM's traditional strength on the commercial side," Mr. Ricciardi told analysts.

In its financial report, IBM also qualified the performance of its commercial desktop PC business, saying that revenue growth was modest. Mr. Ricciardi described "reasonable" sales performance and "probable" market share growth.

In this setting of shifting customer tastes--and ongoing cost cuts--IBM reported 3Q97 net earnings rose to $1.4 billion, or $1.38 per common share, from $1.3 billion, or $1.23 per common share, in 3Q96. Revenues for the quarter ended Sept. 30, 1997 grew 3 percent--8 percent at constant currency--to $18.6 billion. The company said it aims for revenue growth in the high single digits.

Commercial Gains,

Consumer Slips

The PC division was a hot topic at the phone conference. "We had mixed results, as in the second quarter," said Mr. Ricciardi to analysts. "We gained share in commercial PCs in the quarter but lost share in the consumer space."

In commercial, "Revenue growth was modest. We had strength and weakness. In Japan, where IBM is the third largest PC company, our typically strong performance was set back by an overall industry slowdown, channels attempting to maintain only two weeks of inventory, and NEC's announcement on shipping IBM compatible models which freed the channels."

Mobile was also feeling the heat. "Our normally strong mobile PC segment continues to feel the increased competition of a market where supply has caught up to demand."

In the server business, "We had another very strong quarter, doubling volumes over last year with great performance in all major geographies."

In total, commercial PC share was up in the the quarter..."probably."

In the consumer space, IBM "clearly lost share this quarter...When we launched our Aptiva brand, we deliberately targeted the high end of the sector. It was the most attractive financially and the most logical extension into the consumer arena from IBM's traditional strength on the commercial side.

Sweeter And Cheaper

"The sweet spot of the consumer market did shift to the mid-price and low-price segment faster than we anticipated. Last July, I said we had begun to roll out a new mid-price Aptiva in Europe and Canada in the second quarter, which would be followed by the U.S. in the third quarter.

"This product is doing very well in every respect and now our issue is lack of supply. We recently announced consolidation of the consumer division into the PC company, which will consolidate development, manufacturing and order fulfillment of Aptiva into the commercial desktop systems; it will lower costs and bring products to market faster."

Mr. Ricciardi elaborated: "Commercial desktops business, which is a solid performer, is moving reasonably well. In the mobile business, where we have a very strong product set for '98, there are supply and demand issues that we mentioned in July; we have some inventory that we will have to flush through the system which we are hopeful we can do in the fourth quarter, possibly some spillover into the first quarter."

In the consumer market "...the market just moved a lot faster to the low end than we were able to do, we are on the case like a trout on a fly. These are not problems that can't be fixed." The high end is considered to be about 28 percent of the consumer market and IBM is "playing in about a quarter of the market."

He added: "The market has moved very dramatically to the below-thousand-dollar level and we are looking at that very carefully."

No Drama In Drives

Addressing hard disk drives, Mr. Ricciardi said: "Revenue growth was strong but not as dramatic as it has been in the past quarters. There is more price pressure. We are rebalancing supply to areas of higher demand, such as the high-end commercial desktop market." A tough compare with last year but a "positive story" nonetheless.