This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Big Blue Stays Cautious on Second-Half Projections

Updated from 4:17 p.m. EDT:

Technology juggernaut IBM (IBM) Wednesday evening posted in-line second-quarter earnings on softer-than-expected sales.

For the quarter, the Armonk, N.Y.-based company reported net income of $2 billion, or $1.15 a share, matching the consensus earnings estimate of analysts polled by Thomson Financial/First Call. Year-ago earnings were $1.06 a share.

Slipping
Revenue growth slows at Big Blue
Source: The company.

Revenue, meanwhile, came in light. It totaled $21.6 billion, about $1 billion below expectations and roughly flat with the year-ago period.

IBM wasn't bullish about the second half, saying ongoing weakness in PCs and hard disk drives will continue to hurt results. Additionally, IBM said it is now seeing signs of slowing in its microelectronics business as OEM customers reduce purchases.

IBM has risen more than 20% this year, as investors have embraced the very thing for which critics attacked the company during the last years of the hyper-bull market: its diversity and its large exposure to the mainframe business. IBM holds a virtual lock on that business, which produces a stable stream of recurring maintenance and service revenue. Such annuities make up about 40% of IBM's sales.

Serve and Protect

In general, and as one may have expected, business was not brisk. IBM posted year-over-year declines in its hardware and software segments. Sales of personal computers and hard disk drives were particularly weak.

But without doubt, the company's best-performing segment was services, where revenue rose 6.8% in the second quarter. IBM's Global Services division racked up about $16 billion of new signings, bringing the company's backlog up to a staggering $95 billion. The exact schedule by which that backlog will be converted into revenue isn't clear. Nor is it known how profitable deals signed today will be 10 or 15 years down the road. But IBM's services backlog seems to be providing the company a sort of stability that tech outfits like EMC (EMC) and Veritas (VRTS) lack.

Even so, the second-half outlook CFO John Joyce gave on the conference call following the earnings release wasn't encouraging. Like many other tech execs before him, Joyce pointed to the weakness in Europe, where a strong dollar is making U.S. products more expensive for consumers and corporations. The strong dollar is hardly a new phenomenon. It's been a matter of U.S. policy for several years, and Joyce himself noted on the conference call that IBM hasn't been helped by currency exchange fluctuations since 1995. But even so, he said, the dollar could take its toll on IBM's results in the second half of 2001.

No Predictions

"If the dollar continues to be strong, the year-to-year hit to our earnings in the second half could be 14 cents," Joyce said. "We're making no prediction here. We're simply giving you the facts, making the assumption that the dollar remains at today's strong levels."

IBM said that it's been able to absorb the negative effects of the strong dollar thus far. But it warned that could end if business doesn't turn around in its microelectronics business, where sales could decline by about 15% in the second half of the year.

"If demand in microelectronics picks up in the third quarter and continues to expand in the fourth quarter, we will be encouraged," said Joyce. "But if our major microelectronics customers do not start growing their businesses in the third quarter, our ability to cover these nonoperating items could be problematic, and could cost us a few cents more." IBM's microelectronics business includes a wide swath of semiconductor and networking products.

Joyce also told analysts that it would be reasonable to assume equity writedowns of $100 million to $125 million in the second half of the year. That would work out to about 5 cents a share, Joyce said.

IBM fell $4.25 Wednesday to close at $104.28. In after-hours trading on Island, IBM dropped $2 to $101.81.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs