International Business Machines' profit dropped 27% in the third quarter, the company reported Monday, increasing the likelihood of its first back-to-back annual profit declines in more than 50 years.
The Armonk, N.Y.-based computer maker said its net earnings were $1.08 billion for the quarter ended Sept. 30, down from $1.47 billion in the year-ago period.
It was the second consecutive quarter that IBM's net earnings had dipped. But Wall Street had been expecting the poor showing, and the company's stock, which has taken a drubbing in recent months, did not suffer greatly.
In a slow trading day, IBM was the second-most active issue and lost $1.625 to close at $122 a share in composite New York Stock Exchange trades.
The report was "in line with our depressed expectation," said E. F. Hutton analyst Michael Geran. Last week, despite the company's introduction of new mid-size products, IBM shares lost $7.25.
It was word of some faltering in IBM's international operations that triggered investors' chagrin with the stock last week. In a statement Monday, IBM Chairman John F. Akers repeated the dour news, saying: "Growth in our world trade operations has begun to moderate, and we have yet to see a turn in the weak North American business environment we have experienced over the last year and a half."
IBM's revenue in the third quarter totaled $11.9 billion, up nearly 2% from the $11.7 billion that it posted in the comparable period of 1985.
Lower Dollar Helped
For the first nine months of the year, IBM's profit totaled $3.4 billion, a 12% drop from the first three quarters of 1985. Revenue for the period was $34.3 billion, off 4% from the sales pace that last year resulted in total annual revenue of $50 billion.
During the past 18 months, strong overseas sales have helped compensate for the slumping U.S. market. Also this year, favorable currency exchange rates have buoyed income. IBM estimated that the lower value of the dollar, compared to 1985 rates, improved net earnings for the first nine months of 1986 by $470 million and added $3.1 billion to its nine-month revenue tally.
Analysts are concerned that the slippage overseas will add to the time that it takes the company to return to robust profit increases.
"We had previously anticipated the overseas operation would bail out the United States," Hutton's Geran said. "But clearly, the overseas market is catching the virus that afflicts the United States."
Restructuring Product Line
IBM's strategy, analysts said, is to incur short-term profitability declines for the benefit of a long-term gain in market share as it restructures its product lines, cost structures and revenue sources.
In his statement, Akers said: "We believe the actions we are taking to reduce our costs, expenses and resources, coupled with the continued strengthening of our product line, position us to capitalize on a business turnaround when it occurs. We remain confident about the long-term growth of the information industry and IBM's participation within it."
In contrast, Digital Equipment, IBM's primary competitor in the minicomputer arena, has managed to increase its share of the computer market, and its profits as well.
Lately, industry analysts have been as high on Digital in the near term as they have been churlish about IBM.
Geran said: "The issue is, can a $50-billion elephant learn to tap dance, vis-a-vis Digital, and improve its price performance and stop erosion of its market share?"