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IBM may fix slump by firing 10,000 - analyst

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IBM could cull up to 10,000 workers to make up for a disconcerting first quarter revenue shortfall, according to a top financial analyst. The question is whether these cuts will tidy the bottom line enough to offset what appear to be broad problems plaguing the company.

During a conference call yesterday to explain a 9 cent per share earnings miss, IBM confessed it would consider a "sizable restructuring" but declined to detail what form this reorganization would take. Sanford Bernstein's meticulous analyst Toni Sacconaghi has predicted the restructuring will likely result in between 5,000 and 10,000 staffers losing their jobs. If there are job cuts, they will probably be tied to IBM's mainframe business and particularly mainframe workers in Europe, according to pundits. IBM's mainframe business suffered a double-digit drop in sales during the first quarter, and weak economies in Europe and Japan were blamed for the overall revenue miss.

Sacconaghi delivered worse news to IBM's shareholders, saying the first quarter slip up looks even darker upon close inspection.

IBM surprised Wall Street by releasing the first quarter results yesterday - days ahead of an initial April 18 report date. IBM pushed up the release because of the materially weaker than expected results.

With analysts already on edge from this move, IBM reported first quarter revenue of $22.9bn, which missed the consensus estimate of $23.7bn. This revenue total marked a 3 per cent decline year-over-year in constant currency. Not the kind of performance the market wants to see from the IT world's biggest player.

But it was the earnings per share (EPS) miss that really spooked the analysts. IBM handed out two EPS figures - one standard number and one accounting for a new policy of expensing stock options. Sacconaghi was not moved by either number.

"EPS including options expense was $0.85; ex-options, EPS was $0.95, a nine cent miss vs. consensus estimates ($1.04) prior to last week, when IBM told analysts to lower estimates $0.14 due to options expense," the analyst wrote today in a research note. "We note that IBM’s guide-down of earnings by $0.14 last week did not reflect the true expected cost of options in the quarter of $0.10."

Interesting.

In addition, IBM's results seem detached from the economic issues affecting rivals.

IBM complained about Germany, France and Italy dragging down sales. It also flagged a precipitous drop off in sales during March as the main reason Q1 turned out so bad.

"The earnings miss feels to be in good part (perhaps 50% or more) due to IBM specific reasons rather than market reasons," Sacconaghi wrote. "(We) note that: (1) Sun noted that its quarter exhibited fairly normal linearity; (2) the consulting market appears to be stronger in Europe than other regions and Accenture had strong consulting book-to-bill; and (3) Dell and Sun both commented that the US (not Europe) was their weakest region."

Investors and industry watchers will need to decide whether this really is an IBM-only syndrome or if technology spending is pulling back in a big way. Such a crucial question couldn't arrive at a worse time for IBM's stock. The blemished Q1 popped up during a painful week-long slide on the US markets, leaving IBM way down from its Monday high of $87.56. Shares of IBM are trading at $77.14 - down more than 7 per cent on the day. ®

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