IBM Says Profit Will Be Lower Than Expected
International Business Machines on Wednesday surprised Wall Street for the second time this year with news that its quarterly earnings will be lower than expected.
The announcement, which sent IBM stock down $6 per share to close at $111.50 in heavy trading on the New York Stock Exchange, was seen as yet another sign that the computer industry’s weakness is more pervasive and persistent than many analysts once thought.
“Things are just not as rosy and the industry is just not as strong as many of us want to believe,” said Martin Ressinger, an analyst with the Chicago investment research firm of Duff & Phelps.
The nation’s largest computer maker said profit for the quarter ending Sept. 30 would dip below projections because of new product delays, a customer preference for leasing over sales and the strength of the U.S. dollar, which reduces the value of profits generated in foreign countries.
The company also raised the possibility that its 1989 annual earnings could be lower than those for 1988 if there is no immediate improvement in business conditions. Last March, the company blamed lower-than-expected first-quarter profits on problems with a crucial semiconductor used in its top-of-the-line mainframe computer. IBM earned $5.82 billion in 1988.
Delay Blamed
IBM did not offer its own profit estimates for the 1989 third quarter, but it said analysts’ projections of per-share earnings of $2.10 to $2.30 were overly optimistic. A spokesman said the company expects analysts to lower their estimates for the period to $1.40 to $1.80 a share. The company earned $2.10 a share, or $1.24 billion, in last year’s third quarter.
IBM spokesman Peter Thonis said the primary effect on earnings came from a loss of potential third-quarter sales of a mainframe disk storage unit whose introduction, originally set for July 25, has been delayed indefinitely.
Although analysts had expected the new product delays and the strength of the U.S. dollar to erode profits, several said they were surprised by the large number of customers that have decided to lease rather than purchase new IBM equipment. Although the shift can result in larger revenue over the length of the leases, it cuts into immediate revenue because payments are spread out over time.
But analysts said the significant increase in leasing business indicates that customers are shying away from major purchases, either because of economic concerns or fears that rapid technological advances will soon make their new equipment obsolete.
