IBM Sees Earnings Fall, But Future May Be Bright

IBM reported Wednesday first-quarter 2002 revenues totaling $18.6 billion, a decrease of 12 percent compared with the first quarter of 2001. First-quarter net income this quarter was $1.19 billion, a 32 percent decrease from $1.75 billion from one year ago. The last time IBM's numbers fell to such a degree was in the early 1990s before the arrival of recently retired CEO Lou Gerstner. Samuel Palmisano, IBM president and CEO, recently replaced Gerstner as CEO last month.

"Our first-quarter results, while disappointing, were largely the result of the continued weak global business environment," Palmisano said in a statement. "However, even within this tough climate, we generated $1.7 billion in pre-tax income, we had very strong services signings of more than $15 billion and we believe we gained or held share in high-priority segments of services, software, servers and advanced storage products."

IBM's revenue in the Americas and Asia-Pacific declined the most, with a 9 percent decrease from the first quarter of 2001. OEM sales fell 37 percent, to $1.3 billion, from a year ago, while hardware revenues decreased 25 percent, to $6.4 billion. Big Blue's server and storage products, including the heavily promoted zSeries mainframe, also experienced declining sales in the first quarter. However, IBM CFO John Joyce says the declining sales for the quarter represent deferred purchases rather than a lack of interest from customers. Joyce also says the company has stabilized. IBM officials expect to meet analyst predictions of $83 billion in revenue and earnings of more than $4 for the year.

There are signs to support Big Blue's positive outlook. IBM Global Services faired much better than the other divisions, reporting a slight drop of 3 percent in the first quarter to $8.2 billion. IBM officials say the $15 billion in services contracts represent a 50 percent jump year over year and a record for a first quarter.

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While IBM remains the industry's IT services leader by a wide margin, the company has seen significant progress in its once-lackluster software business. Software revenues decreased 1 percent, to $2.9 billion, from a year ago, but middleware products--which make up 80 percent of IBM's software revenues--grew 6 percent. IBM's Internet application server platform, WebSphere, grew 53 percent year over year for the 12th consecutive quarter of double-digit growth.

In addition, IBM's WebSphere has gained market share in the hotly contested Internet application server market against market leader BEA Systems. IBM is heralding a new report from analyst firm Giga Information Group that has IBM and BEA locked in a dead heat for first place with 34 percent of Internet application server market share apiece, based on 2001 numbers.

IBM's database management software, DB2, grew 12 percent year over year, according to the company, putting pressure on market leader Oracle. IBM made little mention in its report of its software subsidiaries, Lotus and Tivoli. Big Blue stated that Tivoli revenues "rebounded" but did not elaborate. The report did not mention the performance of fellow subsidiary Lotus.