Market declines on IBM warning

Jim Krane

Monday, April 8, 2002 | 11:12 a.m.

NEW YORK -- Technology colossus IBM Corp. jolted Wall Street today, warning investors that its first quarter earnings per share would come in well below analysts' expectations.

Investors responded by dumping its shares. In morning trading on the New York Stock Exchange, IBM shares dropped $11.25, or 11.6 percent, to $86 a share.

IBM Chief Financial Officer John Joyce blamed the warning on a "very tough" business environment, exacerbated by the traditionally weak first-quarter technology sales.

"We saw a continued slowdown in customer buying decisions in the first quarter," Joyce said.

Many IBM "customers chose to reduce or defer capital spending decisions until they see a sustained improvement in their businesses," Joyce said.

IBM said it expects to earn 66 cents to 70 cents per share for the quarter, which ended March 31, compared to the 85 cents per share expected by analysts surveyed by Thomson Financial/First Call.

IBM earned 98 cents per share in the first quarter of 2001.

The quarter's revenues are expected to be in the range of $18.4 billion to $18.6 billion compared with $21.0 billion in the first quarter of last year, IBM reported. Analysts had been looking for IBM revenue of $19.65 billion in the first quarter.

Joyce said IBM's Technology Group, which makes semiconductors and storage drives sold to computer makers, will be particularly hard-hit. He said he expected the division to lose $200 million in the first quarter, amid revenue declines of around 35 percent.

IBM is committed to "taking actions to improve our competitiveness" Joyce added.

On Friday the company laid off 600 workers in its massive Global Services division.

In January IBM signed a three-year, $5 billion outsourcing agreement with Sanmina-SCI Corp., an electronics manufacturer, to assemble IBM desktop computers and save costs. The contract included a transfer of 900 IBM employees to Sanmina.

Analysts covering IBM issued widely diverging statements today.

At Merrill Lynch, analyst Steven Milunovich wondered whether IBM's warning stemmed from a more cautious attitude about earnings forecasts by new chief executive Samuel Palmisano.

"It is not clear to us as to whether the business is getting that much worse or this announcement reflects the inclinations of the new CEO," Milunovich wrote. "We believe that management may be inclined to set the earnings expectations lower going forward."

Palmisano took over for retired chief executive Louis Gerstner on March 1. Gerstner remains the company's chairman.

Meanwhile UBS Warburg analyst Don Young issued a glowing report that emerged just minutes before IBM's earnings warning.

On the basis of its strides in the market for computer network servers, Young termed IBM stock a "strong buy." Since October, Young has issued reports guessing that IBM's stock would rise to a target of $140 per share.

Young was unavailable to comment on IBM's subsequent warning.

IBM will report its first-quarter results on April 17.