IBM Profit Up 16.3%; Digital’s Net Drops 0.8%
International Business Machines and rival Digital Equipment Corp. traded places in profits on Wednesday as IBM announced a 16.3% increase in the latest quarter and Digital reported a 0.8% decline.
IBM’s strong results and Digital’s weaker ones came as a switch after more than two years in which IBM was regarded as a stumbling giant and Maynard, Mass.-based Digital as its burgeoning, main rival.
IBM’s stock jumped $2.50 a share to $116.125 in consolidated New York Stock Exchange trading. Digital announced its results, as it always does, after the close of the market. Its stock had risen 75 cents a share to $108.375.
Most encouraging in IBM’s report was that revenue rose 10% in the first three months of 1988 compared to a year earlier, the biggest revenue gain since an 18.4% rise in the 1985 fourth quarter.
Analysts said Armonk, N.Y.-based IBM showed strength at the two extremes of its product line: personal computers and big, mainframe computers. That fits the pattern of the industry as a whole, said analyst Jay Stevens of Dean Witter Reynolds.
“It looks like there’s a trend as we start out the year toward a two-tier system,” Stevens said.
Digital and other companies that earn most of their money from a middle tier of minicomputers are slowing down, Stevens said. His comments were borne out later in the day by Digital’s earnings announcement.
Forecast Decline
IBM’s first-quarter earnings slightly exceeded the mean analysts’ estimate compiled by Institutional Brokers Estimate System, a service of Lynch, Jones & Ryan brokerage house. Digital’s earnings were in line with forecasts that Digital had communicated to Wall Street in an effort to prepare investors for bad news.
The company’s stock had sunk last month after it lowered its forecast from $2.70 a share to $2.50, then lowered it again to $2.30.
IBM’s earnings of $913 million were up from $785 million in 1987’s first quarter. Revenue rose to $11.75 billion from $10.68 billion a year earlier.
“We are pleased that customers are responding positively to our strengthened product line,” John F. Akers, IBM’s chairman and chief executive, said in a prepared statement.
Digital’s earnings in its third fiscal quarter ended March 26 totaled $305.1 million, down from $307.6 million a year earlier.
Digital’s revenue rose 17.2% to $2.82 billion from $2.41 billion.
For the first nine months of its fiscal year, Digital said its profit rose 19% to $904.6 million from $760.2 million a year earlier.
Demand Reduced
Results at Digital would have been worse if not for sharply lower taxes. The company’s income before income taxes was $406.9 million in the latest quarter, down from $460.2 million a year earlier.
Kenneth H. Olsen, Digital’s president, issued a statement saying: “The company’s order rate growth, while not what we planned, continues to outpace that of the industry and is particularly robust for workstation products.”
Digital said demand for some of its larger computers was less than planned because of such factors as customers’ evaluation of new products and their concern about U.S. and overseas economic conditions.
IBM’s new Personal System/2 line benefited from an industrywide boom in personal computer buying and the 3090 mainframe line was helped by price cuts and performance improvements that were announced in the first quarter, said Michael Geran, an analyst for Nikko Securities Co. International.
Growth was strongest in Europe and the Far East and weakest in the United States, he said.
Despite slow growth in recent years, IBM returned in 1987 to its customary role as the nation’s most profitable company. Exxon Corp., which had usurped the top rank in 1986, fell back to No. 2 in a Forbes magazine list of 500 companies ranked by net profit.
Sales of products other than software rose 14.3%, an encouraging rise in IBM’s biggest business segment. Software revenue jumped 21.7%, continuing its rapid rise, while revenue from maintenance, rentals and other services fell.
“Things look pretty good,” said Wendy Abramowitz, an analyst at Argus Research Corp. She said the gain in hardware sales was “really exceptional.”
