IBM Corp had done such a good job of driving down second quarter expectations that when some very storm-damaged figures came out, the market jumped for joy that they were not as bad as the blue funk IBM had suggested, and the market jumped for joy. At the close in New York yesterday, the Dow […]
IBM Corp had done such a good job of driving down second quarter expectations that when some very storm-damaged figures came out, the market jumped for joy that they were not as bad as the blue funk IBM had suggested, and the market jumped for joy. At the close in New York yesterday, the Dow Jones Industrial Average was up 67.32 points, or 1.3% and that was all down to IBM – by far the biggest leaper in the index, it was up $11.75, or 12.8% at $103.50. The headline figure was a 22% fall in profit to $1,350m or $1.35 a share as sales growth slowed – users waited for the new CMOS boxes due in September, falling memory chip prices hurt IBM, and currency fluctuations meant that translation of foreign business into dollars made it look worse than it was. Turnover rose 4% to $18,200m – and without the effect of exchange rates, IBM’s sales grew 9%, but that is a false figure, because the dollar had been undervalued before rather than being overvalued now, so present levels are likely to be what IBM will have to learn to live with. US business was up 11% at $7,800m, Asia-Pacific was $3,600m, about flat in dollars, but up 19% in local currencies; Latin America grew 6% to $786m but Europe was horrible, down 2% at $6,000. Lou Gerstner was chirpy on the results, but when you look at the gross margins, you have to wonder why. Hardware sales were off 1% at $8,576m and gross margins slumped to 33.4% from $40.1% as water-cooled mainframes disappeared from the mix. Services business, including the cock-ups in Atlanta, rose 22.8% to $3,734m but gross margin faded to 20.8% from 21.5%. Software grew 4% to $3,195m and margins rose to 68.4% from 65.3% – but most of that stuff was all but fully amortized in about 1985 or earlier. The CMOS machines cost less to maintain, so maintenance fell 6.5% to $1,754m and the gross margin on it fell to 47.8% from 53.8%. And rentals and financing rose 4.7% to $924m with an improved gross margin, 57.4%, up from 55.7%. But that slump in hardware margins meant overall gross margin eroded to 39.5% from 43.5%.
Tivoli Systems Inc performed strongly, IBM said, and Lotus Development Corp experienced continuing strong sales, and Notes users jumped to 6.3m from 2.2m a year ago. Lou Gerstner’s message was that it was a tough quarter, but that results were largely affected by a few short-term factors, particularly a sharp drop in memory prices and currency. The fact that we earned $2,600m in the first half of 1996, even with these short-term issues, speaks to the resiliency of IBM. But what really gives us a sense of optimism are the many manifestations in the second quarter that our long-term strategies are working, he says. Simply put, our traditional businesses are continuing to re-invent themselves and our newer businesses are showing great strength. In products, he says AS/400 revenues increased; Unix processors, led by the high-end SP2, had an exceptional quarter; and demand remained strong for System/390 products. And it was the second quarter in a row of solid performance by the Personal Computer Co. In services, he says, IBM closed nearly $4,000m in new contracts.