IBM Shatters Q1 Earnings Projections; AS/400 Down Again

IBM began the first quarter with a bang, announcing first quarter records in net income, earnings-per-share and revenues.

Net income for the quarter totaled $1.5 billion, compared to $1.0 billion in the first quarter of last year. IBM also reports its 1999 diluted earnings per share finished at $1.55, well above the Wall Street consensus of $1.41 per share, and far surpassing the $1.05 earnings-per-share in the first quarter of 1998. In all, first quarter revenues grew 15 percent from the first quarter of last year to $20.3 billion.

In a public statement, Louis V. Gerstner, IBM chairman and CEO, said, “We started 1999 with a strong first quarter. We saw a significant improvement in our business in Asia, and we also had double-digit revenue growth in Europe and the Americas.

"What's more exciting, however," according to Gerstner, "is that this quarter’s performance is a direct reflection of the power of strategies we have put in place over the last few years. Services is clearly the largest and fastest-growing portion of the information technology industry, and we continue to extend our leadership position each quarter."

IBM Global Services revenues grew 19 percent to $7.6 billion, while total hardware revenues increased 17 percent from the first quarter of 1998 to $8.6 billion in 1999. Software revenues rose 10 percent to $2.9 billion, compared to revenues during the same period last year.

Despite the increase in overall hardware revenue, the AS/400's revenue declined for the second consecutive quarter. After experiencing double-digit revenue growth in the last quarter of 1997 and the first three-quarters of 1998, the AS/400’s revenues dipped a little in the last quarter of 1998 and has now dropped again in 1999.

Steve Josselyn, research director for commercial systems and servers for Framingham, Mass.-based International Data Corp. (IDC), was not surprised to see the AS/400 revenues decline and offered a few reasons why.

“From the time they introduced the new e-series model, the AS/400 experienced double digit growth for four consecutive quarters,” Josselyn says. “So, when you’re experiencing double digit growth and trying to improve on those numbers, its harder to grow. Plus, it wasn’t a big surprise because the first quarter is typically slow anyway.”

Perhaps the biggest reason for the decrease in revenue, however, is IBM did not introduce its newest AS/400 -- the AS/400 700 series -- until February.

The anticipation of the new 700 series release and the fact that IBM had little time to sell it in the first quarter contributed to the decrease in revenue for the AS/400 series, according to IBM sources.

Despite the decrease in revenues for the second consecutive quarter, Josselyn sees no reason for concern. “I do not believe this is an indication that we are going to see a decline in AS/400 revenues the rest of the year,” he says. “And I do not see this as an indication that the AS/400 is an unhealthy market.”

--J. Martin

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