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OEM biz worst hit

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ComputerWire: IT Industry Intelligence

IBM Corp shocked the market with a profit warning yesterday that led to investors wiping a staggering $17bn from the company's trading value.

Armonk, New York-based IBM said yesterday that sales for its first fiscal quarter 2002 would be between $18.4bn and $18.6bn, about 6% less than it had led analysts to expect, and 12% lower than in the same period a year ago. It said profit would be hit even harder, with pre-tax income down to between $1.65bn to $1.75bn from $2.49bn a year ago.

CFO John Joyce said that the company experienced a "continued slowdown in customer buying decisions" in what was traditionally its weakest quarter. "Many of our customers chose to reduce or defer capital spending decisions until they see a sustained improvement in their businesses," he said.

Though the weakness was seen across the board, Joyce said that its OEM technology business, which includes hard disks and chips, was hit especially hard. This dragged sales in its Technology Group down 35% during the quarter, and the unit is expected to make a pre-tax loss of $200m.

Its shares fell more than 11% in early trading, its largest one-day fall in almost 18 months. IBM will report its final first-quarter results on April 17. IBM's shares closed down 10.12% yesterday, at $87.41. IBM will report its final first-quarter results on April 17.

In a research note yesterday, Merrill Lynch said "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. We believe that management may be inclined to set the earnings expectations lower going forward."

In a separate note, the bank said that "Given increased accounting scrutiny, IBM's proclivity to stretch to make earnings on disappointing revenue was becoming a liability."

Nevertheless, the note, added, "IBM's preannouncement is bad for tech overall given that IBM has been gaining share in many segments. End user demand is weak, even for the seasonally softest quarter of the year."

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