Big Blue Takes a Big Hit

Stock dropped 10 percent Monday

• By Chris McConnell
• 04/09/2002

Making its first earnings warning in over a decade, IBM stock dropped over ten percent yesterday. IBM issued a terse warning before the markets opened Monday morning, indicating its first quarter earnings would not meet expectations.

The last time Big Blue issued an earnings warning came in 1991, about two years before Lou Gerstner took on the CEO role. IBM will release its report for the first quarter on April 17. Analysts believed the company would earn 85 cents per share in the first quarter, down from 98 cents per share a year ago, but IBM told them to expect earnings in the 66 to 70 cent range yesterday.

In the wake of the warning, IBM stock dropped $9.84 to $87.41, a 10.12 percent fall in value. Creating doubts about the overall tech market, IBM’s woes dragged down other tech stocks.

IBM attributed the shortfall to poor performance in its Technology Group, which makes products for OEMs and other third-party vendors. The group includes Mylex, which makes storage controller chips; the custom chip lab, which mints Transmeta Inc.’s Crusoe processor; and its hard drive business.

Observers pointed out that the shortfall comes as Sam Palmisano takes the reins as IBM’s CEO, wondering if Gerstner left in time for the company to miss targets under someone else’s watch. IBM nearly missed its targets in the fourth quarter of 2001; the sale of its optical transceiver business boosted the company past analyst expectations, but drew criticism from those who believed IBM’s reporting bordered on Enron-style accounting trickery.

Accounting maneuvering may account for some of the dramatic shortfall. Goldman Sachs analyst Laura Conigliaro told The New York Times Palmisano might be lowering expectations by understating the company’s earnings. With lower expectations, Palmisano’s future achievements may seem greater. “Given the miss, why not take the hit and lower expectations?" she said.

Not everyone in the tech sector had bad news to share. Compaq Computer Corp. said it would meet analysts' expectations.