IBM investors get 'Big Blue' bruise

[notiCIas]

IBM investors get 'Big Blue' bruise

IBM shocks Street with a worse than expected (and early) 1Q report. Shares of IBM, other techs fall.

April 14, 2005: 6:47 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - IBM, one of the world's largest technology companies, stunned Wall Street by reporting first quarter earnings and sales that were well below analysts' estimates.

The surprise announcement also came two business days before IBM was supposed to report its first quarter results. IBM had previously said that the company would release first quarter numbers after the market closed on Monday April 18.

Shares of IBM (Research), a Dow component, plunged nearly 5 percent after hours, according to INET. IBM's stock had slipped 1.1 percent in regular trading on the New York Stock Exchange. Based on where the stock was trading after-hours, IBM looks primed to open on Friday at a new 52-week low.

Other tech bellwethers were also hit hard on IBM's disappointing news, setting the stage for a potentially ugly open on Friday for the sector as investors fear that first quarter results for many tech companies could be worse than expected.

Cisco Systems (Research) fell 1 percent while Intel (Research), Microsoft (Research) and IBM rival Hewlett-Packard (Research) each fell about 1.5 percent. IBM competitor Dell (Research) dropped nearly 3 percent. Sun Microsystems (Research), another IBM rival, plummeted 5.5 percent after reporting worse than expected quarterly results as well.

For that matter, IBM's woes are likely to bring down the entire market on Friday. The SPDR (Research) exchange-traded fund, which tracks the S&P 500, and the Diamonds (Research), an ETF which tracks the Dow, both fell about 1.1 percent in after-hours trading.

IBM's stock has slipped as of late on concerns about how a weakening economy could impact tech spending in the U.S. Several tech companies, most notably in the software sector, have warned that they will miss first quarter forecasts.

"Part of the weakness has to do with global IT demand. This is a moderately negative signal about the tech spending outlook. But it's clearly more than just IBM," said Richard Petersen, an analyst with Pacific Crest Securities.

In addition, there has been some confusion about IBM's earnings since the company decided to expense options beginning in the first quarter.

IBM made the move ahead of an accounting rule change that will require all companies to report the cost of stock options plans in their income statements, as opposed to being buried in footnotes. The rule change was set to take effect in mid-June but the Securities and Exchange Commission agreed to delay the onset of the rule by a couple of months on Thursday.

Analysts slashed their earnings estimates for IBM during the past week to reflect this change.

Still, it was a bad miss for IBM. The company reported earnings that were five cents lower than analysts' revised forecasts.

The company also said that sales increased just 3 percent from a year ago. Analysts were forecasting a 6 percent increase. What's more, the company said that excluding the effect of the weak dollar, which helps boost the value of IBM's international sales, revenue increased just 1 percent from the first quarter of 2004.

In a written statement, IBM chairman and CEO Samuel Palmisano, said that the company had "difficulty closing transactions in the final weeks of the quarter, especially in countries with soft economic conditions." Palmisano added that the company also experienced weakness in its massive global services unit, which accounted for more than half of the company's sales in the quarter.

To that end, IBM reported contract signings of $10 billion for this division in the first quarter. Some analysts were hoping that IBM would report new bookings of at least $11 billion.

IBM's software and hardware businesses also posted soft results. Software sales were up just 2.4 percent from the same period last year while the hardware division, which includes servers, storage and personal computers, rose a scant 0.2 percent. (IBM is in the process of selling its PC business to China's Lenovo Group.)

During a conference call Thursday, IBM chief financial officer Mark Loughridge said that the quarter started well. Revenue was up 6 percent year-on-year through February, he said. But sales fell in March, leading to the lower than expected results. IBM, like many technology companies, closes many deals in the final weeks of its quarter.

"Business fell off very late in the period," Loughridge said. "Overall, we could have done better this quarter but we had two soft weeks."

Loughridge said IBM saw the biggest drop-off in Italy, Germany, France and Japan. He added that IBM would take some restructuring actions to address some of the weaknesses in its business lines but he did not give specifics.

He also said that analysts' earnings estimates for the second half of the year were "reasonable" but that earnings growth would likely be driven by lower expenses as opposed to higher sales.

Loughridge did not comment about the second quarter outlook, however. Analysts currently expect IBM to report earnings of $1.13 a share in the second quarter, including the costs of stock compensation, and sales of $24.9 billion.