IBM’s Profit Again Exceeds Quarterly Forecast
International Business Machines said Monday that its second-quarter profit rose 5.2% to $1.41 billion on an 8.5% increase in revenue, the second-consecutive period that the world’s largest computer maker exceeded Wall Street expectations.
Although industry analysts and company executives were pleased by the results--which the firm attributed to strong demand for software and leasing, and initial results of its restructuring plan--they uniformly cautioned that it was too early to call IBM’s massive turnaround effort complete and successful.
Ahead, analysts said, IBM faces continued competition from smaller and more aggressive competitors in desktop computer markets. It also faces increasing pressure from Japanese rivals, particularly in its lucrative mainframe business, and a potentially tricky transition as it replaces its flagship mainframe model sometime next year.
Even Chairman John F. Akers, architect of IBM’s turnaround efforts, was cautious as he announced the results for the quarter ended June 30. “While first-half results are encouraging, much remains to be done this year. Increased competition and shorter product cycles are the rule in this industry,” Akers said in a prepared statement.
Still, investors were pleased and showed it by driving IBM’s stock price up $1.375 per share to close at $122.375 in New York Stock Exchange trading Monday. That was 25 cents above the previous 52-week high set June 6 and more than $29 higher than its 52-week low of $93.375 set Dec. 15.
IBM attributed the second-quarter performance to strong demand for software across its entire product line, continuing customer interest in leasing higher-cost IBM equipment and the initial savings generated by its $2.3-billion restructuring program started late last year.
Under the program, the Armonk, N.Y.-based company is expected to trim its work force by 10,000 jobs this year, leaving it with about 206,000 U.S. employees by the end of 1990, about 37,000 fewer than in 1985. One analyst suggested that the company may be forced to undertake another round of job slashing next year to cut costs.
Analysts also noted that the persistently weak dollar, which has the effect of increasing foreign sales, also played a major role in the company’s second-quarter performance. According to estimates provided by company officials, favorable currency exchange rates were responsible for between 15 cents and 20 cents of the company’s $2.45-per-share profit in the period. Without that extra income, the company’s profit would have been the same or even slightly lower than those in the prior-year period.
“A lot of things working against IBM have turned positive this year, and I expect a strong half of the year,” said Stephen Smith, analyst with Paine Webber in New York. “But until the company equals its 1984 profits (of $6.6 billion), I’m unwilling to say its ills are completely cured.”
IBM’s second-quarter profit compared to $1.34 billion in the year-ago period. Revenue jumped to $16.5 billion from $15.21 billion.
For the first half of the year, IBM’s profit was $2.45 billion, up 6.8% from $2.29 billion in the first six months of 1989. Revenue grew 9.8% to $30.68 billion from $27.94 billion.
Several analysts said they expect IBM to perform well the remainder of the year, in no small part because it will begin reaping the full effects of its restructuring and the introduction of its new and well-received RS-6000 workstation and model 3390 mainframe disk storage system. In addition, they said, sales remain strong for the company’s older product lines, the AS 4000 mid-range computer and the PS-2 personal computer. However, the company’s PC sales have been spurred by aggressive price-cutting that erodes profit.
Despite the strength of these products, analysts stressed that 50% of IBM’s revenue and 60% of its profit come from its mainframe business, an operation that is about to undergo a massive transition as the company introduces a long-awaited new system sometime next year.
“That product transition is the key issue for the next year,” said Steven Cohen, an analyst at SoundView Financial in Stamford, Conn. “It could be very tricky for them.”
