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IBM turns 1998's $1 billion PC sales loss into 50 per cent increase

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IBM revenue in its first quarter rose 15 per cent to $20.32 billion, and net income of $1.47 billion, was up 42 per cent on the year-ago quarter. Financial analysts were taken by surprise again, as their First Call consensus was $1.41/share, while the result was $1.55/share. IBM turned in hardware sales of $8.58 billion, showing 17 per cent growth and somewhat above the two per cent being forecast by the Street, with small and big iron doing well, but mid-level machines feeling the pinch from HP and Sun. Perhaps the biggest surprise was that the near-$1 billion loss in PC sales in 1998, announced in March, became a 50 per cent increase in sales in the first quarter. IBM credits the turnaround to ThinkPads (growth more than 50 per cent) and Netfinity server sales, and believes these products are sufficiently differentiated to give it an advantage. IBM's chip business was a disappointment, although hard disk drive sales increased. CFO Douglas Maine admitted that IBM's direct selling programme was "embryonic", but claimed that IBM does not expect to upset its resellers, who were "fully aware of the IBM strategy". IBM Internet sales were $3 billion in 1998 (with two-thirds from PC sales), and are expected to increase to $10-15 billion in 1999. Compaq of course alienated some of its resellers by its heavy-handed actions in direct selling, and appears to have lost sales to IBM. Dell is also believed to have lost market share to IBM. IBM's PC shipments grew more than 20 per cent in the US (compared with a 16 per cent market growth), whilst worldwide the growth was about 30 per cent. S/390 sales increased, but RS/6000 sales were down, although the venerable series was recently refreshed with new models, so that sales are not reflected in the quarter's results. Services remains IBM's best performing sector, with nine deals over $100 million being signed in the quarter. Sales of $7.55 billion were up 19 per cent on the year-earlier quarter. Services now accounts for 37 per cent of IBM's revenue. There is a services order book of $55 billion. Software sales grew 10 percent to $2.9 billion, driven by database and messaging middleware, and showing an improvement over the 6 per cent growth seen in 1998, and a two per cent decline in 1997. It is worth noting that IBM's margins on software are more than three times those in hardware or services. Maine said there was no evidence that Y2K issues were affecting IBM so far, and that corporate buying patterns remained the same. Geographically, Asia/Pacific sales were up 20 per cent, but Maine characterised sales in Japan as "still a crapshoot" with some corporate sales improvement, but poor consumer sales. Latin America was down ten per cent, but US sales rose 13 per cent, and EMEA 20 per cent. OEM sales were up just five per cent. IBM had $5.36 billion in cash and had repurchased $2.1 billion of its shares at the end of the quarter. Global financing revenue declined two per cent to $705 million. The gross profit margin was 35.7 per cent compared with 36.6 per cent a year earlier. All in all, shareholders will probably consider that Lou Gerstner deserved his considerable wages for the quarter reported. It appears that IBM has finally got its act together after the bad times. The market evidently thought so, because in after-hours trading, shares jumped $16.625 on the closing price of $171.875, which was up $2.125 on the day. The record high in January was $199, a tripling in three years. ®

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