IBM Posts Strong Quarterly Profit; Share Price Soars : Computers: Big Blue surprises analysts by earning $668 million in the period. Cost cutting gets most of the credit.
International Business Machines Corp. surprised Wall Street on Thursday by reporting a $668-million profit for the second quarter, sending its stock soaring and temporarily quieting critics who say the long-suffering computer giant still doesn’t have its act together.
IBM shares leaped $6.50 to $62.375 in heavy trading on the New York Stock Exchange. The earnings, which amounted to $1.14 a share, contrast with a mammoth loss of $8.9 billion, or $14.10 a share, for the comparable period a year ago. Revenue was $15.35 billion, up from $14.95 billion a year ago.
“We are still far from where we need to be, but we are showing steady improvement,” Chief Executive Louis V. Gerstner Jr. said. It was the third consecutive quarterly profit for the world’s largest computer company after two years of steep losses.
Analysts noted that the improved financial performance came from cost cutting--including large-scale layoffs--rather than growth in sales. Last year, IBM announced plans to cut $7 billion in expenses by 1996, a program that included the elimination of 35,000 more jobs by the end of this year.
Even IBM appears to have been surprised by the results. “Frankly, the earnings improvements have come a bit faster than we thought they were even four or five months ago,” Jerry York, IBM’s chief financial officer, told analysts.
But IBM still has a long way to go in adjusting to a market where computer buyers are turning away from mainframes and mini-computers--long the source of massive profits for IBM--and toward low-margin personal computers.
“Sales of large machines are going to keep declining, so they have to focus on the smaller machines if they are going to increase sales,” said David Wu, computer analyst at S.G. Warburg. “They need to be faster on their feet, introduce products faster and reduce costs. It’s humanly possible. If Compaq can do it, (IBM) can do it.”
Compaq announced earlier this week that its second-quarter sales climbed 53% to $1.6 billion. At that pace, analysts say, Compaq could surpass IBM’s personal computer business by next year.
Many analysts say they are mystified by IBM’s plans in the personal computer area. In a controversial move earlier this year, Gerstner removed the executive who had built up the company’s PC business and replaced him with an executive brought along by Gerstner from his old company, RJR Nabisco.
To do more than improve short-term profit through cost cutting, IBM must find a way to increase revenue, and a good performance in PCs is vital. But the company’s PC sales have flattened after a strong performance last year.
“We need to see if they can create a demand situation for their products, rather than running the company on a strictly financial basis,” said Barry Bosak, an analyst with Smith Barney, who described the company’s performance as sluggish.
The cost cutting seems to be having its intended effect.
However, in reducing costs, IBM must perform a delicate balancing act. The growth area is personal computers, but the bulk of the company’s profit still comes from large mainframes. And it is in that area that Gerstner has pointed his knife.
Some corporate customers who continue to pay millions of dollars for IBM’s large mainframes say they are being shortchanged as IBM reduces the number of workers it offers to service such accounts.
While IBM is cutting support, it is also sharply cutting prices of the big machines. IBM has seen a recovery in sales of mainframes, shipping more last year than the year before and stretching capacity, but actual revenue fell because of lower prices.
Overall, hardware sales climbed a meager 3% for the quarter to $7.7 billion, with most of the increase in sales coming from growth in PCs overseas. IBM’s strongest performance came in the services area, where revenue grew a solid 24%.
IBM’s Comeback
IBM quarterly profit or loss, in millions of dollars:
2nd quarter ‘94: $689
Source: Company reports
