IBM shows Q1 growth but falls short of forecasts

IBM Corp. knocked Wall Street for a loop by announcing first-quarter earnings significantly short of analysts' expectations,

IBM knocked Wall Street for a loop by announcing first-quarter earnings significantly short of analysts' expectations, in a report that came two business days ahead of schedule.

IBM said its first-quarter earnings were $US0.85 per share, below the $US0.90 per share consensus forecast of analysts polled by Thomson First Call. Net income was $US1.4 billion, on revenue of $US22.9 billion, both up 3 per cent from last year's first quarter. Analysts were expecting revenue of $US23.6 billion.

"After a strong start, we had difficulty closing transactions in the final weeks of the quarter, especially in countries with soft economic conditions, as well as with short-term Global Services signings," IBM chief executive officer, Sam Palmisano, said. "As a result, we did not achieve all of our goals for the quarter."

IBM's Global Services revenue for the quarter, which ended March 31, came in at $US11.7 billion, up 6 per cent from last year. Hardware was essentially flat, at $US6.7 billion, while software grew 2 per cent, to $US3.5 billion.

The Global Services unit was hurt by an inability to close some outstanding deals and the decision of some potential customers to delay their purchases until the second quarter, IBM senior vice-president and chief financial officer, Mark Loughridge, said.

However, there were more potential contracts than usual in the Global Services pipeline, Loughridge said.

He expected Global Services to rebound in the second quarter, but declined to give a specific target.

Some analysts were anticipating a shaky quarter. Prudential Equity Group trimmed its revenue forecast last week, citing a shift toward short-term services contracts and challenges to IBM's hardware business.

"We believe a combination of enterprise drive constraints, a lumpy start to the new P5 storage cycle, and some modest increase in competition from Dell's new blade server caused hardware to underperform in the quarter," Prudential Equity analyst, Steve Fortuna, wrote in an April 10 research note.

IBM's hardware business was led by its pSeries servers, which posted a 12 per cent increase in revenue. Revenue from its xSeries servers, based on Intel's chips, increased by eight per cent, while iSeries server revenue increased just one per cent after declining in the previous quarter, Loughbridge said.

The storage divsion ran into problems delivering new equipment, and was forced to substitute older storage equipment at steep discounts, Loughridge said. However, revenue still grew by 5 per cent, he said.

On the software side, revenue from IBM's middleware products grew 3 per cent to $US2.8 billion. WebSphere revenue grew by 11 per cent while revenue from Tivoli software grew 15 per cent, Loughridge said.

While IBM showed growth during the quarter, its wide miss compared to forecasts could bode ill for other companies as quarterly reports begin rolling in. Because of its broad portfolio in software, hardware and services, IBM is often seen as a bellwether for the IT industry.

Siebel ousted chief executive officer, Mike Lawrie, this week after disclosing poor first-quarter results, while BMC Software said that it would lay off 12 per cent of its workforce after it too came up short of expectations during the quarter.

Sun said this week its revenue results were below analyst forecasts for the second quarter in a row.

Loughridge warned that IBM might make reductions in certain areas during the second quarter, especially in Europe and Asia; IBM's performance sagged in France, Germany, Italy, and Japan.

The company remained on track to complete the sale of its PC business to Lenovo Group in the second quarter, Loughridge said. The Personal Computing Division posted $US2.7 billion in revenue, a 3 per cent decline, as desktop PC sales slipped, he said.

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