Wall St. Concurs with Big Blue

Wall Street remained upbeat about IBM despite the company's sluggish performance in the last two quarters.

IBM Wednesday blamed Y2K-related system lockdowns for a mediocre fourth quarter, during which revenue fell by 4% and profits dropped by 11%.

Analysts largely agreed with IBM in dismissing the slowdown as temporary blips caused by Y2K concerns.

IBM stock -- which briefly took a hammering last fall when the company first warned investors of a Y2K-related slowdown -- remained largely untouched this time around.

Contributing to the optimism was the fact that the company continued to be profitable and, in fact, narrowly beat analysts' estimates when it declared income of $2.1 billion on revenue of $24.2 billion for the period ended Dec 31.

However, the numbers were lower than the $2.3 billion profits on revenue of $25.1 billion announced in 1998.

"There are clear indications that this was a Y2K glitch," said Gary Helmig, an analyst at Soundview Financial Group Inc. in Stamford, Conn.

The fact that IBM's services backlog grew by 20% in the fourth quarter to $60 billion, for instance, underscores the basic health of that business, Helmig said.

Similarly, user surveys reveal that there will continue to be a strong demand for mainframe server hardware for the rest of this year, Helmig added.

"IBM's performance, given their Y2K dependency, was essentially not bad," agreed Michael Geran, an analyst at the Pershing division of Donaldson, Lufkin & Jenrette Inc. in Jersey City, N.J.

"From a profit perspective, IBM is exposed disproportionately to 'big iron' . .

. and last quarter it was clear that big iron sales were sick," Geran said.

IBM's overall hardware revenue declined by 11% from the year-ago period to $10.2 billion. Contributing to much of that shortfall was a huge 38% drop in demand for S/390 mainframe MIPS (a standard unit of mainframe performance) during the quarter.

But IBM should be able to make up for much of that shortfall later this year because of continued strong demand for mainframe MIPS, said David Floyer, an analyst at IT Centrix, a mainframe consultancy in Mountain View, Calif.

"It is not unreasonable to expect a 40% growth in MIPS demand," he said.

Also badly hit on the hardware side were sales of IBM's popular midrange AS/400 servers and its RS/6000 Unix servers.

Meanwhile, revenue from IBM's services business came in at $8.7 billion, slightly higher than last year and slower growth than analysts expected. The company said it had closed orders worth $10.3 billion during the fourth quarter, including over 16 contracts worth more than $100 million.

Software revenue, meanwhile, grew 2% to $3.6 billion. Most of that growth came from IBM middleware technologies that are in increasing demand for e-business applications, said IBM Chief Financial Officer John R. Joyce.

IBM had warned analysts to expect a disappointing fourth quarter as far back as last October. The company claimed that widespread system lockdown, particularly of high-end server technologies, would severely affect both hardware and services sales.

Yesterday, Joyce repeated that warning and said IBM expects revenue growth to remain modest for at least another quarter because it will take that long for companies to fully emerge from their lockdowns.

"Our fears regarding a services and software slowdown were realized. However, we do expect a gradual acceleration in both," said Merrill Lynch & Co. analyst Steven Milunovich, in a report following this week's announcement.

Milunovich seemed to share IBM's optimism of strong e-commerce-led growth in 2000.

"[IBM's] earnings momentum bottomed in 4Q and should improve in 2000. . . . Our surveys suggest IBM will be a beneficiary of e-commerce spending" this year, Milunovich's report said.

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