IBM Logs Its First Full-Year Profit Since ’90 : Computers: Big Blue’s cost cutting pays off with fourth-quarter earnings of $1.2 billion.
Reaping the benefits of its prolonged cost-cutting effort, on Monday reported earnings of $1.2 billion for the fourth quarter and posted its first full-year profit since 1990.
But the positive results masked disturbing signs that the computer giant is far from healthy: revenues grew by a puny 3.3% for the quarter, and sales of personal computers declined at a time when the PC industry as a whole was in the midst of a huge boom.
Investors focused on the negatives, driving the company’s shares down $1.125 to $74.25 in New York Stock Exchange trading, even though the earnings exceeded most estimates. The fourth-quarter profit was more than triple the $321 million reported for the comparable period a year earlier. For the full year, IBM earned $2.9 billion, or $4.92 a share, compared with an $8.1-billion loss for 1993.
Profits have returned after nearly 18 months of painful cost-cutting, a restructuring that effectively destroyed the old IBM, long considered a caring employer in a cold corporate world. In 1994 alone, IBM eliminated 26,000 jobs, sold its federal systems business which employed another 10,000, and consolidated numerous facilities worldwide.
The worst is likely over: when Chairman Louis V. Gerstner Jr. announced the cost-cutting plans shortly after taking the helm of the world’s largest computer company in April, 1993, his stated goal was to slash expenses by $8 billion by 1996. He is now $1.7 billion shy of that figure. At the same time, Gerstner said he would reduce the worldwide work force to 215,000. IBM today employs 220,000, down from a peak of more than 400,000 in the late 1980s.
But difficult as the downsizing has been, IBM-watchers say Gerstner now faces an even tougher task: growth. Fourth-quarter revenue was $10.6 billion, compared to $10.3 billion a year earlier--but the computer industry as a whole is growing at double-digit rates.
“We’re far from satisfied,” admitted Jerome York, IBM’s chief financial officer.
The strong 1994 profit performance was largely due to growth in mid-range computers and a slower-than-expected decline in mainframe sales, which had been expected to drop by as much as 50%. But most believe the strength in mainframes is temporary, driven by an economic recovery and the discovery that moving critical corporate computing functions like payroll and accounting onto networks of low-cost PCs and workstations is harder than it looks, and thus must be done slowly.
In newer technology, IBM lagged. The worldwide PC market grew by 27%, according to market researcher International Data Corp., but IBM’s PC shipments declined by 3%.
“They had a confused branding strategy, and they were very behind in getting new products out into the marketplace,” said Eric Lewis, PC market analyst for IDC.
IBM is now second to Compaq Computer--a company created by cloning the original IBM PC--in worldwide PC sales.
Gerstner turned his attention to the PC business in early 1994, replacing longtime IBM exec Robert Corrigan with Richard Thoman, who had followed Gerstner from RJR Nabisco. Thoman streamlined IBM’s many--and often competing--product lines, cutting the number of brands from nine to four and the number of different models from 450 to 70.
Despite the changes, though, IBM continued to make mistakes. While competitors were breaking sales records over the holidays, an unprepared IBM ran out of the Aptiva, its most popular PC. Decent sales in IBM’s older businesses--like mainframes and minicomputers--can cover up lackluster performance in desktop computers for only so long.
“Everyone’s asking, where’s the revenue going to come from?” said Sam Albert, a management consultant. “Gerstner’s cut and cut, but he hasn’t invested in much.”
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Green for Big Blue
IBM net earnings (or loss), in billions of dollars:
1994: $2.965
Source: TradeLine
