rsd97sgn.jpg (7403 bytes)     

|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns 
The copyright-protected information contained in the ANNEX BULLETINS is a component of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.


Analysis of IBM’s First Quarter Business Results

IBM Boosts Stockmarket

Big Blue’s Solid Results Come Amid Gloom and Doom in High Tech Stocks

PHOENIX, Apr. 20 - IBM reported solid first quarter business results amid gloom and doom that had swept the high tech stocks and the market in general during the first half of April.  IBM’s earnings were up 9%, while revenues increased by 9%.  Such results were enough to send today the Big Blue stock soaring 6% to $112, and to give the entire stockmarket a badly needed lift. 

“In the face of weakening economic conditions, the validity of the strategies we put in place over the last five years was underscored time and time again,” boasted the IBM chairman, Lou Gerstner, in a release.  He went on to cite the double digit revenue growth in Asia/Pacific (“up 18 percent”) and in Europe (“up 11 percent”) as proof.

To be sure, IBM’s results were better than expected.  But such boastful comments were misleading as they stated the actual results in constant currency, not as reported, without any equivocation and elaboration.  What Gerstner should have said is that the revenues in Asia/Pacific and in Europe increased in SINGLE digits (up 8% and up 3% respectively).  And that the revenues in Americas went up by 6% (up 7% in constant currency).

Now that’s still not too shabby relative to the red ink and revenue declines that many of IBM’s competitors have been reporting.  But it’s nowhere nearly as rosy a situation as IBM’s self-aggrandizing chairman had tried to portray, crediting his and his company’s supposed prescience.  Especially when taking into account that the first quarter of 2000, to which the current results compare, was the pits (see “IBM: Waiting for Godot,” Annex Bulletin 2000-12, 4/20/2000). 

Even Gerstner agreed with that.  “While we are pleased with our 14 percent revenue growth (Annex ed.: actual was 9%, as you saw earlier), we have not lost sight of the fact that the first quarter of last year was quite weak,” the IBM CEO admitted in the release.

Thirsting for morsels of good news, the stockmarket nonetheless lapped up the IBM announcement, and pushed the stock up despite such minor warts.  

Business Segment Analysis

Hardware.  An 11% surge in IBM’s hardware revenue was perhaps the biggest upside surprise in IBM’s first quarter results.  It was fueled by a 33% surge (in constant currency) in UNIX-based pSeries revenues, and by a 117% jump in OEM business.

On the other hand, mainframe (zSeries) revenues declined despite a 40% increase in MIPS shipments, while the AS/400 (iSeries) volumes shrank by a whopping 28%.  IBM invoked its standard “product transitions” explanation for the latter.

Software.    IBM software revenues also dropped slightly (-0.4%), led by declines in both Lotus and Tivoli business units.  And you guessed it… Armonk again invoked “ongoing transitions” at the two software subsidiaries as its explanation for the disappointing results.

Services.  IBM Global Services (IGS) revenues were up 16% (excluding maintenance, which declined 3%).  Integrated Technology Services (formerly “systems integration”) reported the fastest growth in constant currency - up 29%.  It was followed by a 26% rise in Business Innovation Services, and a 16% increase in outsourcing and e-commerce business (all figures are in constant currency; you should take away about six points to arrive at actual growth figures).

New IGS singings continued at a strong pace, with $10 billion added to IBM’s backlog in the first quarter.  This puts the backlog at $87 billion at the end of March.  But these seemingly impressive figures reveal an underlying negative trend that we have been commenting about for several quarters now.  

Namely, despite IGS’s record new business signings ($55 billion in 2000, for example), this IBM unit managed only a single digit (4%) revenue growth last year.  Why?  Significant contract expirations and cancellations, we speculated.  And now we can assert that based on IBM’s own figures.

As you saw, IBM signed $10 billion of new business during the first quarter.  But its backlog increased by only $2 billion (from $85 billion on Dec. 31, to $87 billion on Mar. 31).  In other words, in just three months, IGS seems to have suffered a loss of $8 billion-worth of business that was still on the company’s books at year end 2000.

PCs, Other.  The PCs and other hardware segments continued their losing ways during the first quarter.  Despite a modest increase in PC revenues (up 2%, from $3.13 billion to $3.19 billion), this unit continued to lose money ($58 million). 

Enterprise Investments, on the other hand, managed to produce both declining revenues (down 19%) and widening losses ($140 million, as compared to a $43 million last year).

Rising Debt.  But perhaps the most worrisome aspect of IBM’s first quarter report card was its increasing debt.  It went up by $700 million since Dec. 31 to $1.8 billion, resulting in a debt-to-capitalization ratio of 9% (vs. 6% at the end of 2000).  This was mostly due to the same old culprit - stock buybacks.  They totaled $1.3 billion in the first quarter.  Since 1995, IBM has now wasted $40 billion on this form of voluntary Wall Street taxation.

Happy bargain hunting!

Bob Djurdjevic















































Volume XVII, No. 2001-10
April 20, 2001

Editor: Bob Djurdjevic
Published by Annex Research

P.O. Box 97100,      Phoenix, Arizona 85060-7100
TEL: (602) 824-8111        FAX:

|Annex Research | Annex Bulletins | Quotes | Workshop |

Feedback | Clips | Activism | Columns |