AS/400 Revenues Down in 4Q

AS/400 revenues fell, year-to-year, for the first time in a year in the fourth quarter of 1998 as IBM revenues, despite growing, fell short of Wall Street estimates.

IBM recorded fourth-quarter 1998 diluted earnings per common share of $2.47 on revenues of $25.1 billion and net income of $2.3 billion. The record revenue total was an increase of 6 percent over the fourth quarter of 1997, but still fell short of Wall Street estimates, due in large part to drop-offs in Asia/Pacific and Latin America revenues.

“The revenues were lighter than I was assuming,” says Gary Helmig, analyst with Stamford, Conn.-based SoundView Financial. “When you have a company that sized, whenever you have growth, you’re going to have record revenues, but it wasn’t a record rate of growth by any means.”

Hardware revenues fell 2 percent to $11.3 billion as revenues declined for AS/400, RS/6000 and S/390. System/390 computing power shipments did increase by 60 percent however [as measured in MIPS] with the revenue decline attributed to price reductions. Storage and personal computer revenues increased.

"AS/400 customers were anticipating an important new product announcement later this quarter so demand slowed in the face of that," says Douglas Maine, IBM senior VP and CFO. "A fact of life these days is that product introductions happen and they happen at a faster pace than they have before. We have a new version of our [System]/390 coming next year, the G6. We have a very important new version in February of the AS/400, which we think will be a big hit. Our RS/6000, the benchmarks, particularly at the high end, are better than our competitors. That should serve us well. It's up to execution."

Helmig agrees.

“The AS/400 was a part of the [fourth-quarter revenue] problem. It was in transition since there was a new line of servers coming up [Feb. 26]. And I expect it will continue to be somewhat of a problem this coming quarter, but then it will start to pick up after that.”

David Andrews, managing partner of the Cheshire, Conn.-based D.H. Andrews Co., says the product transition and other factors caused the fourth quarter AS/400 revenue drop-off.

“Something you always have to look at with these revenue announcements is that they’re comparing revenues to the same quarter the previous year. And the fourth quarter of 1997 was unusually strong. Sometimes, there’s a case where you have massive shipments of big multiple orders and your results can be heavily skewed by customers ordering thousands of machines at one time. And there are some AS/400 customers who do that.”

Andrews says other factors such as a strong third quarter, delay in the release of Lotus Domino R5, even the Year 2000, could have negatively affected AS/400 sales in the fourth quarter. None of that is a cause for concern, he says.

Andrews also points out that IBM changed its release pattern in 1998, which could also be skewing the 4Q numbers.

“The trend up until a year ago was to have the big announcement around Labor Day, which would cause a big surge [in sales] in the fourth quarter. Last year, they had a minor announcement in the fall, for purely pragmatic reasons, not strategic.”

Last spring of course was the groundbreaking V4R2 release that brought native Java and Lotus Domino to the AS/400. V4R2 had come on the heels of the September 1997 foundation-laying V4R1 release. So the September 1998 release of V4R3 was minor in comparison.

“There wasn’t any practical way to get a big release out in September last year,” Andrews says. “That combination of events got them off the ‘big one in September’ track.”

Andrews concedes that last month’s announcement and May’s V4R4 release are not major releases either, but still probably had at least a psychological effect on the customer.

“The word was out that the next wave of stuff was coming in February. Might that have had an impact on the fourth quarter? Absolutely.”

Andrews says he expects 1999 will end up being a strong year for the AS/400, due in large part to the estimated 250,000 CISC AS/400s still in use that will need to be upgraded.

“All these people with white [CISC] boxes have to do something about upgrading for the Year 2000. They can move up to V3 on the white box and write a large check to IBM just to go to V3 or they can write a little bit of a larger check to go to a black RISC box and move up to V4R3 or R4. We think the value vs. price proposition for upgrading to RISC is a pretty good deal. I look for increasing numbers of these people to discover the Model 170 this year which should cause 1999 to be a strong year for the AS/400 Division.”

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