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NMARKET SAVVY

IBM Profit Well Above Forecasts

Earnings: Company reports $1.5 billion for first quarter, predicts more revenue growth for industry in '99.

April 22, 1999|JOSEPH MENN | TIMES STAFF WRITER

Countering talk of a widespread slowdown in the computer business, a bullish IBM on Wednesday reported first-quarter profit of $1.5 billion, well ahead of analyst projections, and predicted continued industry growth for the rest of the year.

The world's largest computer company predicted 9% revenue growth for the trillion-dollar information technology industry in 1999 and said its customers aren't indicating that the year 2000 computer glitch will cause them to delay purchases.

IBM's profit jumped 50% from a year earlier to $1.55 a diluted share as sales climbed 15% to $20.3 billion. Analysts polled by First Call had been expecting $1.41 a share, on average.

"IBM set the record straight on a lot of issues--information technology growth and their view of the evidence so far on Y2K--and they underscored just how deep the reach of the Internet is," said Goldman Sachs analyst Laura Conigliaro. The company estimated that the Internet is responsible for as much as a third of its revenue.

IBM's results, released after the markets closed, were in sharp contrast to those at its closest rival by size, Compaq Computer, which Wednesday reported the diminished profit of $281 million, or 16 cents a share, that it had projected two weeks ago.

IBM shot up to $180 in after-hours trading, after rising $2.13 to $171.88 on the NYSE during the day. It set a record of $199.25 in January, before falling personal computer prices hurt stock values throughout the industry.

Earlier this month, Compaq executives said much of the trouble was due to slackening corporate demand for computers. But Compaq's board thought otherwise, asking for CEO Eckhard Pfeiffer's resignation over the weekend.

"Compaq was trying to blame the industry for its woes, and you've got pretty much a retort here," said J.P. Morgan analyst Daniel Kunstler. "This is a relatively accommodating industry. If you've got the right message and the right value added, you can do quite well--that applies to Sun [Microsystems] last week and IBM this week."

Compaq is trying to do what IBM has done successfully: move up the food chain to more powerful, more profitable computers and focus on giving advice to big customers.

"Services is clearly the largest and fastest-growing portion of the information technology industry, and we continue to extend our leadership position each quarter," IBM Chief Executive Louis Gerstner said in a statement.

Armonk, N.Y.-based IBM continued to lose money in the personal computer business in the first quarter, but its losses there narrowed to $89 million from $458 million in the first three months of last year.

The company said its profit margins improved partially because it began selling to some of its largest customers over the Web and that it expects to sell more than $10 billion in goods and services that way this year.

Profit on services soared 34% in the quarter to $973 million before taxes, and software earnings climbed 10% to $657 million.

IBM said demand for its services, which now account for 37% of company revenue, was strong across the category and that in software, it passed Oracle for the leading market share in database products.

"It's a great start," Chief Financial Officer Douglas Maine said.

But "it would be premature to come to any new conclusions about remaining quarters of the year" at IBM, he said.

John Jones Jr., an analyst at Salomon Smith Barney, said that despite IBM's outlook, there will be scattered reports of year 2000 purchasing delays.

But he said IBM's feedback "should help to put some rational reflection in the market."

* MORE EARNINGS: C2, C3

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