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IBM sees Y2K issue hurting sales

Customers bought early - possibly from somebody else, if you check sales levels for Big Blue's last quarter

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IBM issued what amounts to a profits warning yesterday, with Lou Gerstner putting the blame on Y2K. He said that IBM would "continue to feel the effects of the Y2K slowdown in Q4 and early into next year". CFO Douglas Maine said "It is more than apparent that many customers had bought ahead to accommodate Y2K testing" and that this had "slowed the deployment of more complex systems". Gerstner thought that predicting next year was difficult, but once the "lingering Y2K effects" declined, "next year has the potential to be a very good year for IBM". IBM did make its Q3 numbers by announcing earnings in line with expectations, but it was not enough to stop a $5 drop in the share price to $102 overnight. The Q3 revenue was $21 billion, up 5 per cent from a year earlier but down 3.5 per cent from the previous quarter. Net income for the quarter was $1.8 billion, up 18 per cent on the year-earlier quarter but down 26 per cent on the previous quarter. Gerstner said that Q3 was "decidedly mixed", which is perhaps not surprising since the company is in effect five separate businesses. The negative side included large servers, and to a lesser extent services and OS software, but there was growth in services, non-OS software (especially Tivoli) and OEM business. Logically, if Y2K is to be the scapegoat, it is more useful to compare the previous quarter's results rather than those of the year-earlier quarter, in order to get a clearer picture of the trend. If you do this, what you find makes gloomy reading: hardware sales are down 6 per cent to $8.8 billion; global services are down 1 per cent to $8 billion; software is down 4 per cent to $3 billion; global financing is up 4 per cent to $0.77 billion; and enterprise investments are down 7 per cent to $0.62 billion. It is possible that the results will revive talk of creating baby IBM's to increase shareholder value, but the counter argument, cited by Gerstner, is that it was the breadth of IBM's business portfolio that gave it resiliency. Sales in the Americas were essentially flat compared with a year earlier; EMEA was down 2 per cent; and Asia-Pacific grew 28 per cent. The sale of the global network business to AT&T for $5 billion brought $730 million in the quarter, with IBM recognising a pre-tax gain of $586 million ($366 million after tax). The acquisition of Sequent, Mylex and DASCOM resulted in a pre-tax charge of $111 million. CFO Douglas Maine suggested that Q4 would probably yield 78 cents/share, compared with 93 cents/share for Q3 (90 cents after the one-time gains), with Q1 earnings next year probably being flat compared with a year earlier. With IBM coming clean about Y2K effects on its business, it could well trigger some more forthright statements from other companies that did not want to be first to break the bad news. Financial analysts were surprised at IBM's forecast of a future downturn. In the medium term however, sales are likely to pick up since Y2K has resulted in greater top-management awareness of the need for up-to-date systems to exploit e-commerce. Consequently, sales from the end of the first quarter next year could prove to be very robust. Meanwhile, IBM will be undoubtedly be subjected to close scrutiny for the next two quarters. ®

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