IBM Bids Goodbye, Good Riddance to Y2K

Dismal Financial Performance Blamed on Millennial Lockdowns

Perhaps no one was as happy to see the New Year ring in as IBM, with the possible exception of the AS/400 division, which saw revenue decline in the fourth-quarter 1999 for its fifth consecutive quarter.

Blaming its financial decline on the Y2K lockdown, IBM announced fourth-quarter 1999 diluted earnings per share of $1.12 with net income totaling $2.1 billion. Overall, fourth-quarter revenues fell 4 percent to $24.2 billion. For the entire year, IBM revenue grew 7 percent to $87.5 billion.

Although IBM’s earnings per share beat analysts’ consensus, Big Blue still dropped considerably compared to the fourth quarter of 1998, when earnings per share were $1.24 and net income totaled $2.4 billion.

“As we had anticipated, the Y2K issue hit us hard in the fourth quarter,” says Louis V. Gerstner, IBM chairman and CEO. “Many of our large customers—who handle much of the world’s critical data—had locked down their computer systems as they prepared for the Y2K transition. While we were pleased that this transition is proceeding smoothly for our customers, these lockdowns had a significant negative impact on our revenue and earnings in the quarter.”

The main culprit for the decline was hardware revenues, which fell 11 percent (10 percent at constant currency) to $10.2 billion. Revenues for the RS/6000 mid-range and Netfinity PC servers actually increased, but could not overcome decreases in platforms such as the S/390 and AS/400.

During a media teleconference, John R. Joyce, IBM senior VP and CFO said that, “The continued weakness in the ERP market, which represents a third of AS/400 sales, contributed to the decline.”

While IBM did not disclose how steep the AS/400 revenue decline was, Steve Josselyn, research director for Commercial Systems and Servers at International Data Corp. (Framingham, Mass.) says he expected it “to be very significant.”

Josselyn also said he was not surprised by the AS/400’s decline, noting that IBM had forewarned customers and the media. He did not, however, paint a bright picture for the AS/400’s future, especially in the lower-end servers. “I think the AS/400 is going to have more and more trouble competing, especially at the lower end,” he says. “The Intel-based systems are growing in popularity and are much cheaper than the AS/400 at the lower end. Other systems are also growing more efficient in the entry-level space, and if there’s a dramatic price differential, it’s going to make it harder for IBM to compete. It’s a problem they’re going to have to deal with going forward.”

Although Y2K is over, Joyce warned that IBM would continue to feel the lingering effects of the Y2K lockdown, predicting that first-quarter profits would be flat or slightly below the 78 cents per share in the first quarter of 1999.

In addition, according to a report from Reuters News Service, Gerstner set a 180-day deadline for the world's largest computer maker to prove that the dismal second half of 1999 was an exception and not the rule. The report goes on to say that he sent a strongly worded letter to employees stating, "As I see it, we have two quarters -- 180 days -- to prove that the second half of 1999 was an aberration, not the beginning of a trend."