IBM Shares Drop on Y2K Profit Warning
In one of the strongest millennium bug warnings to date, shares of IBM Corp. fell sharply Wednesday after the company said profit may fall for the next two quarters because fears about the year 2000 computer problem are causing customers to delay new hardware purchases. Big Blue said the scare had already depressed sales of its large server computers in the most recent quarter.
The world’s largest computer company said it earned $1.7 billion from operations in the third quarter, or 90 cents a share, in line with analyst expectations.
But the falloff in sales of most of its server models dragged overall hardware revenue down 1% from a year earlier. Total revenue rose 5.2% to $21.1 billion.
“We saw a Y2K slowdown toward the end of the quarter, particularly in our large servers and to a lesser extent in services and operating systems software,” Chief Executive Louis V. Gerstner Jr. said.
IBM shares, up $5.63 to $112.75 in regular trading, plunged as low as $101 in after-hours activity.
Chief Financial Officer Doug Maine warned that in the fourth quarter, IBM might earn 15 or 20 cents a share less than last year’s $1.24 a share. For the first quarter of next year, he said profit might come in “flat to slightly lower” than the 78 cents earned in first-quarter 1999.
After that, server sales and profit should rebound, Maine said on a conference call with analysts.
The warnings surprised investors, since IBM hadn’t complained much about the millennium bug affecting customer habits, even well into the just-completed quarter.
“They had no idea what was going to happen, and neither did anyone else,” said Kimball Brown, an analyst with Dataquest. The bug causes computers to mistake the year 2000 for the year 1900.
Earlier this week, Microsoft said Y2K fears haven’t been a drag on earnings at the largest software company. And other server companies haven’t faulted the bug much recently.
Sun Microsystems last week reported that its most recent quarterly sales jumped 25%, and Hewlett-Packard cited sales problems, not Y2K, for its slump in server sales.
But Brown said that IBM is more vulnerable to Y2K fears because it makes the largest server computers, up through mainframes.
“It’s the mainframes that are really having these problems,” Brown said. “If you have a $5-million machine, that’s going to have a bigger impact than if one [much smaller] server goes haywire on you.” Brown said he believes that IBM’s servers could regain their momentum later next year.
IBM also said it has been hurt by a shortage of flat-panel displays for its popular Thinkpad notebook computers and by an increase in prices for memory chips.
The company has been losing money on its personal computer business, and it is reducing staff in that division. IBM announced Tuesday that it will discontinue most home PC sales through retail stores at the beginning of the year.
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