IBM Profit Plunges 48% in Quarter, 27% for Year : Top U.S. Computer Maker Posts First Back-to-Back Declines in Annual Earnings Since the Depression
International Business Machines said Tuesday that its profit plunged 48% in the fourth quarter of 1986, driving earnings for the year down nearly 27%--an expected, if highly unusual occurrence for the nation’s biggest computer maker.
The disclosure means that the company has reported its first back-to-back annual profit declines since the Depression, provoking Chairman John F. Akers to reflect, in a classic example of IBM understatement, that “1986 was a difficult year for IBM.”
Indeed, 1986 saw IBM’s earnings slip to $4.8 billion from $6.5 billion the year before, even though revenues were up 2.4% to $51.2 billion. Perhaps more significantly, through the year IBM lost market share in many computer industry segments, and its earnings report Tuesday came amid signs that its competitors aren’t about to let up the pressure.
Digital Equipment, which last week reported a 98% rise in profits for 1986, on Tuesday announced a new computer configuration aimed directly at IBM’s solar plexus: the mainframe market. And Apple Computer, one of IBM’s rivals in the personal computer market, showed that it continues to strengthen its balance sheet even while IBM’s has faltered: Its profit for the first quarter rose 2.8% on a 24% increase in sales.
Investors seemed prepared for IBM’s news, despite driving the stock up more than $5 a share Monday in the false hope that earnings wouldn’t be so bad. In Tuesday’s trading, IBM shares closed off $2.50 to $122.75 on the New York Stock Exchange, generally reflecting a weak technology sector.
“IBM’s in a transition, and the market knows that,” said E. F. Hutton analyst Michael Geran. “So the market will ride other horses until IBM can complete its transition.”
That transition, computer industry watchers said, won’t start showing up as profit increases until as late as the third quarter of this year. But the fourth quarter was the “worst of the worse” for IBM, they said. In the fourth quarter ended Dec. 31, the company reported profit of $1.39 billion; revenue fell 1% to $16.9 billion.
The current quarter will look better--if only because it will be “less bad,” said Rick Martin, an IBM analyst for Sanford C. Bernstein in New York.
Still, IBM isn’t starting the year with the same lead in the computer industry it has had in the past. In 1986, IBM was choking on stale product lines, while other companies were moving in with innovatively designed and priced products. In many areas, this year IBM will be playing a catch-up game.
In personal computers, low-priced clones and new, technologically superior machines on the high-end have taken a chunk of IBM’s business. Although IBM is expected to announce several new personal computer products--the first possibly as early as next week--many industry watchers doubt that the new machines will be exciting enough to dampen clone sales, or even that there is enough demand to spur a fast sales start for the PC updates.
IBM may be able to stop the hemorrhaging of its mid-range market--where Digital Equipment has been getting fat--by the end of the second quarter.
That’s when it should be at full volume on shipments of the new mid-size product it announced last year.
Many analysts doubt that Digital can cut inroads deeply into IBM’s mainframe customer base, especially with the product configuration announced Tuesday. But they also question whether IBM can improve its sales in mainframes, the big computers used to power large corporate computer systems.
The company doubts it as well. It stated that “it sees no definitive sign of demand improvement in its worldwide business operations at this time.” The most optimistic predictions are for flat sales of mainframes, a high-margin business that in the past has been the key to IBM’s health. If that’s the case, IBM will lag the anticipated 8% to 10% growth in the computer industry this year.
Cost Cutting May Help
But analysts say cost-cutting measures the company took in 1986, including a highly successful early retirement program, mean the company won’t need 10% growth to see strong profit improvement. “If IBM could (have) a 10% revenue growth, its earnings would be twice that,” analyst Martin said.
The results of IBM’s belt-tightening and product-freshening programs are expected to show up in the second half of 1987, and most analysts are betting that’s when the company will put the brakes on the profit decline.
At Apple Computer, where profits grew only modestly, analysts said the news was better than expected and cited the robust sales growth. Revenue increased to $662.3 million, compared to $533.9 million in the same period a year ago.
Profit at the personal computer maker rose to $58.5 million from $56.9 million in the year-ago period.
Analysts said the company’s profit margins should continue to improve with the anticipated introduction of new Macintosh later this year.
Sales of the Macintosh, estimated to account for half of Apple’s business, “played a more significant role in the December quarter than in previous years,” Apple’s Chairman John Sculley said in a statement.
However, Sculley reiterated warnings that the current, second-quarter results will be down from the year-ago mark, and analysts attributed that to increased costs associated with readying the new products for market.
Meanwhile, Wang Laboratories, the Lowell, Mass.-based maker of computers and word processing systems, said it lost $78.9 million in the second quarter, nearly double its first-quarter loss. However, the company still predicts a return to profitability by the end of its fiscal year.
The company said it took a $37-million charge in the quarter associated with cost-cutting measures.
