IBM’s Profit in Quarter Declines 7% : 3rd Straight Drop, but Analysts Expect Rebound by Year-End
IBM reported its third consecutive slide in quarterly profits Friday, but analysts said the world’s biggest computer company has now cleared the decks for a sharp improvement in the final three months of 1985.
Blaming a sluggishness in orders for its biggest computers, International Business Machines said earnings slipped 7% to $1.47 billion for the period on a 9.7% gain in revenue to $11.7 billion.
But IBM said that shipments of its newest generation of mainframe computers have accelerated and that the weaker dollar is improving its overseas results. As a result, analysts said, the company could enjoy a profit surge of 20% to 25% in the fourth quarter compared to a year earlier.
Even with a strong fourth quarter, however, IBM will be fortunate to finish 1985 with any earnings growth at all--a poor showing by IBM’s standards and one that will fall far short of the industry’s expectations as the year began.
15% Growth Rate for Decade
The Armonk, N.Y.-based company has said it expects to match or exceed a 15% growth rate annually through this decade, and analysts last winter were predicting 1985 earnings of more than $12 per share. But, starting in June, IBM executives began warning that earnings weren’t meeting expectations.
“Their previous statements had to back us all down to this level of expectations,” said analyst P. Martin Ressinger of Duff & Phelps in Chicago. Even with a big fourth-quarter improvement, Ressinger said, “they’ll still be well below what we were expecting.”
The third-quarter earnings, equal to $2.40 a share, compared to $1.58 billion, or $2.60 a share, in the same quarter last year. The revenue gain was over the year-ago gross income of $10.66 billion.
For the year to date, IBM’s profit of $3.87 billion, or $6.31 a share, falls 12.2% behind its results at this time last year. To break even for the year, IBM would have to earn some $2.7 billion for the final quarter--which is roughly the 25% gain that E. F. Hutton predicts.
In trading Friday on the New York Stock Exchange, IBM was the sixth most active issue with almost 1.4 million shares changing hands. It closed up $1.25 at $125.625.
Analyst Michael Geran of E. F. Hutton said IBM earnings for the fourth quarter will surge on the strength of shipments of more than 400 new-generation mainframe computers at about $5 million apiece. Each of the computers requires an IBM disk drive costing another $500,000 to $1 million apiece.
Geran, who believes that IBM could finish 1985 a few cents ahead of last year’s $10.77-a-share earnings, was referring to IBM’s new 3090 series of mainframe computers. Mainframes, the big computers used by corporations and other large institutions, are IBM’s most profitable products, accounting for as much as half of its earnings.
IBM announced its 3090 series last February as the system that will replace earlier-generation machines. The announcement had the effect of stalling orders for less advanced computers as customers decided to wait for the newer, and supposedly better, generation of mainframes. IBM didn’t start shipping the 3090 series until midway through the third quarter, and then at a slow rate.
“The effects of this year’s earlier pause in IBM (mainframe) installations continue to be reflected in our year-to-date results,” said John F. Akers, IBM president and chief executive. “However, we began shipments of our new IBM 3090 processors in the third quarter and look forward to strong fourth-quarter shipments.”
With its extensive overseas operations, IBM has also suffered from the strong dollar, which made its products more expensive overseas. But, as the dollar has fallen recently against other currencies, Akers said, the fourth quarter “should reflect a positive effect.”
IBM said that, if the dollar had been at the same level throughout the first nine months of this year that it was in 1984, the company would have had an additional $1.24 billion in revenue and $230 million in net income.
“The continuing concerns are the softness in the North American economy along with slower capital spending and their effects on our business,” Akers added.
C INTERNATIONAL BUSINESS MACHINES
