1999 Begins With a Bang, But AS/400 Down

IBM began the first quarter of 1999 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 Global Services grew 19 percent to $7.6 billion, hardware revenues grew revenues increased 17 percent to $8.6 billion, and software revenues rose 10 percent to $2.9 billion, compared to revenues in the same period last year.

Despite the increase in hardware revenue, the same could not be said for sales of the AS/400, as its 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 revenue 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 at International Data Corp. (Framingham, Mass.), 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, it’s 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 the fact that IBM did not introduce its newest AS/400 computer -- the 700 series -- until February. According to IBM sources, the anticipation of the 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.

Despite this decrease in revenues for the second consecutive quarter, however, neither IBM nor the analyst community seem to be raising red flags.

"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," Josselyn says. "It’s nothing to be concerned about.

"We absolutely do not think this is an indication of the AS/400 being an unhealthy environment," concurs an IBM spokesman. "We’re going to continue to take an aggressive approach to marketing the AS/400 in all geographies."

In a public statement, Louis V. Gerstner, IBM chairman and CEO, spoke of his company’s overall performance, "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. This quarter’s performance is a direct reflection of the power of strategies we have put in place over the last few years."

In addition, IBM’s 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.