Slumping hardware sales cause IBM revenue drop

For the second quarter in a row, IBM Corp. reported sharp year-over-year declines in revenue and net income. Big Blue still managed to edge past analysts' expectations, however, and turned a US$2.3 billion profit for the fourth quarter of 2001.

IBM's 11 percent year-over-year revenue drop, to $22.8 billion, was caused primarily by slow PC sales and weakness in the company's OEM (original equipment manufacturer) business, Chairman and Chief Executive Officer Lou Gerstner said in a statement accompanying IBM's financial release. IBM's OEM revenue dropped 34 percent from its fourth-quarter 2000 total.

Together, IBM's technology and PC groups lost $500 million in 2001, according to John Joyce, IBM's chief financial officer. IBM's recently announced deal to outsource production of its NetVista desktops line should help improve its PC results, Joyce said in a conference call with analysts following IBM's release of its financial results.

Even IBM's highly-regarded Global Services consulting unit suffered from the market crunch: Revenue from the unit declined 1 percent year-over-year, to $9.1 billion, although the unit's gross profit margin improved slightly. IBM's "annuity-like" outsourcing and maintenance businesses did well during the quarter, while the company's consulting and systems integration businesses were impacted by the weak economy, Joyce said.

Hardware revenue dropped 24 percent from the fourth quarter of 2000, to $8.7 billion, while revenue from IBM's z900 line of mainframe servers was essentially flat. There were a few bright spots in the troubled sector: On a full-year basis, IBM's mainframe revenue grew for the first time since 1989, the company said, and its newly introduced Regatta Unix servers are sold out.

IBM's software business stayed strong despite the market downturn, with revenue growing 6 percent year-over-year to $3.8 billion, the company said. Revenue from IBM's data management software increased 48 percent, while WebSphere revenue grew 43 percent. Software and services contract signings accounted for nearly 80 percent of IBM's profit during the quarter, Joyce said.

IBM cut its research and development expenses 13 percent during the fourth quarter, to $1.3 billion, largely through the integration of Lotus and Tivoli into its software group, Joyce said. More than five years after acquiring Lotus, IBM quietly increased its efforts in 2001 to tie Lotus' operations to its own.

IBM edged past analyst expectations for the quarter, posting earnings per share of $1.33. The consensus estimate of analysts surveyed by Thomson Financial/First Call was for earnings of $1.32 per share. IBM's fourth-quarter net income was $2.3 billion, a 13 percent decrease over its fourth-quarter 2000 revenue.

IBM also reported its full-year 2001 results, posting net income of $7.7 billion, down from $8.1 billion in 2000. Revenue for 2001 totaled $85.9 billion, a 3 percent decline from 2000's $88.4 billion.

IBM is not anticipating a dramatic economic rebound any time soon. The first half of 2002 "doesn't appear to have a much different economic look to it than what we've just come though," Joyce said. When the market does pick up, IBM's broad array of products and services will be its greatest advantage, he suggested.

"Customers are really starting to expect more of their IT vendors," Joyce said. "When the economy turns (around), customers are not going to return to that roll-your-own-IT era."

Joyce also lightly zinged Hewlett-Packard Co.'s pending merger with Compaq Computer Corp. "Many of our competitors are trying to find ways to emulate our capabilities, but it is not something that can be simply acquired. It takes years of investment to build this capability," he said.

Ahead of the results, shares of IBM (IBM) ended trading Thursday on the New York Stock Exchange up 2.26 percent, at $119.90.

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