Plunging hardware sales drive IBM revenue drop

IBM reported Tuesday a 19 percent decline in third-quarter 2001 net income over the year-ago period, while its revenue dropped 6 percent, to US$20.4 billion.

Hardware revenue dropped 21 percent from a year ago, a decline driven by weak PC sales, the Armonk, New York-based company said in a statement. Software revenue grew 10 percent, however, to $3.2 billion, and IBM's Global Services unit reported 5 percent growth, to $8.7 billion.

The quarter demonstrated an "acceleration" of a fundamental shift in buying behavior, with customers spending less on hardware and more on services and software, IBM Chairman and Chief Executive Officer Lou Gerstner said in the statement.

In one bright spot for its hardware division, sales of IBM's zSeries servers grew strongly during the quarter, Gerstner said, as customers consolidated servers into more powerful mainframe computers. IBM's iSeries portfolio of mid-range servers also showed sales growth, while revenue from its high-end pSeries declined. IBM blamed the drop on customers waiting for its p690 Unix server, formerly codenamed Regatta, which went on sale earlier this month.

IBM earned $0.90 per share, slightly topping analyst expectations. The consensus estimate of analysts surveyed by Thomson Financial/First Call was for earnings of $0.89 per share. The company's third-quarter net income was $1.6 billion, down from $2 billion in the year-ago quarter.

The Sept. 11 attacks on the U.S. delayed the closing of some contracts, primarily among domestic customers, according to IBM. Financial services and insurance sector deals were hardest hit, and already-slow orders for PCs and microelectronics products dried up even further, Chief Financial Officer John Joyce said in a conference call with analysts.

IBM is optimistic about growth in its outsourcing business during the next quarter, according to Joyce, who pointed to "a very strong pipeline of opportunity."

The most glaring red ink on IBM's balance sheet was in its Personal Systems division, including notebook and desktop PCs. Discounting currency fluctuations, PC revenue dropped 29 percent year-over-year and declined 9 percent from 2001's second quarter, Joyce said. To compensate, IBM slashed plant inventories by 25 percent and channel inventories by 35 percent.

IBM's Microelectronics division also posted a sharp decline, of 30 percent, from last year's third-quarter. IBM cited a severe downturn in the semiconductor industry as a factor, and said it expects revenue from the division to pick up after the fourth quarter of 2001.

Joyce avoided making firm predictions about the future of the economy -- and about IBM's short-term sales outlook.

"What's the timing and strength of the recovery?" he asked rhetorically during the call with analysts. "That's a call I'm going to leave to you. ... When the economy recovers, we expect to be in an even stronger competitive position, and to return to our model of high single-digit revenue growth."

Ahead of the results, shares of IBM (IBM) ended trading Tuesday on the New York Stock Exchange down $0.15, at $101.85.

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