IBM 1Q00 Revenues Surpass Expectations

But still decline -- Y2K lockdown, ERP slowdown blamed

As expected, the first quarter of 2000 was a tough one for IBM, with revenues decreasing five percent to $19.35 billion from the year-ago quarter. There was some positive news, however, as it surpassed analyst expectations by earning $0.83 a share, a 6 percent increase from the year-earlier period.

Overall, first quarter net income was $1.52 billion, compared to $1.47 billion last year, as IBM was able to push profits higher by slashing costs 6 percent. IBM blamed the lingering effects of the Y2K lockdown and an enterprise resource planning (ERP) slowdown for much of the sales decrease.

"If IBM as a whole gets its act together, I’m pretty bullish on the AS/400 market."

-- Wayne Kernochan, VP Aberdeen Group

Leading the decline in sales was IBM’s overall hardware market, which saw revenues fall to $7.7 billion, a decrease of 12 percent. In particular, PC, hard disk drive, and DRAM sales all suffered major declines.

On the AS/400 front, the news was much better. After five consecutive quarters of decline, AS/400 revenue actually increased, raising 5 percent year over year. Although IBM has temporarily managed to stop the bleeding, there were still concerns, however, as Big Blue reported that AS/400 revenues grew mostly because of upgrades and not new sales, a bad sign for a server that continues to fight its “old-school” technology label.

The upgrades had an adverse impact on OS/400 and DB2/400 sales, which plummeted 16 percent in the quarter and were largely responsible for IBM’s flat sales growth in software revenue.

Despite the fact that many of the sales came from upgrades, Wayne Kernochan, managing VP for platform infrastructure, Aberdeen Group (Boston) saw no reason for concern. “One quarter of sales largely coming from upgrades won’t get me concerned, if this goes on for another two or three quarters, then I would be concerned,” he says. “When you equate what the overall server platform did, a 5 percent increase was not that bad.”

While admitting that IBM is having trouble getting new AS/400 customers, Kernochan was quite optimistic about the AS/400s future. “Based on what I have seen, the AS/400 is putting up a nice story for being a good black box for the Internet,” he says.

In particular, Kernochan pointed to the growth of the Internet service provider (ISP) and application service provider (ASP) markets as major opportunities. “Those two markets along with the Internet business-to-business e-commerce market all have the potential to play to the AS/400 strengths,” he adds. “It’s a real opportunity for the AS/400 to break out of its installed base. If IBM as a whole gets its act together, I’m pretty bullish on the AS/400 market.”

Kernochan’s view coincides with that of GartnerGroup (Samford, Conn.) VP and research director Tom Bittman, who predicted in the February 7, 2000 issue of MIDRANGE Systems that AS/400 revenues would take off in the third and fourth quarters of 2000.

In other news, Global Services revenues were flat at $7.6 billion. IBM signed $8.6 billion in services in the first quarter and e-business services revenue grew 70 percent.

OEM revenue fell 19 percent to $1.4 billion, while Global Financing revenues increased 16 percent to $816 million. In the Americas, first-quarter revenues totaled $8.4 billion, down 4 percent from the same period of 1999. On the other hand, Asia/Pacific revenues increased 15 percent to $4.0 billion.

Looking ahead, IBM CFO John Joyce says that IBM is confident the Y2K lockdown is behind them and said that he’s optimistic that things will turn around very quickly. “For all practical purposes, Y2K is behind us,” he says. “Several of you have said you see IBM as a second-half story. Based on what we know at this time, we agree with this assessment.”

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