IBM (IBM) - Get Report topped Wall Street's earnings estimates for its third quarter, earning $1.5 billion, or $1.56 per share, for the period ended Sept. 30, up from the year-ago quarter's $1.4 billion, or $1.35 a share. Analysts polled by First Call projected Big Blue would earn $1.53 cents a share.
Revenue jumped to $20.1 billion from $18.6 billion a year ago despite some continuing weakness in Latin America and Asia. Hardware sales rose 4% from a year ago.
Coverage of the company's earnings conference call will be forthcoming.
The following item was posted at 9:30 a.m. EDT Tuesday:
IBM Looks to Keep the Fire Burning
With all the uncertainty in the tech sector lately, it's good to know that a bedrock stock like
is expected to report, after the close of the market today, healthy numbers. The stock is up 30% year to date and has held up very well over the last two chaotic months. Big Blue, after years of indecisive leadership, has convinced Wall Street that it can deliver.
The Armonk, N.Y.-based behemoth has been successful in its widely publicized move into software and business services, but new challenges are nibbling away at its hardware market.
Analyst consensus estimates expect the company to earn $1.53 per share in its third quarter, up 12% over the year earlier's $1.35, according to
. IBM's strong software (Lotus) and enterprise hardware (the S/390 and AS/400 mainframe products) -- which make up 45% and 35% of profits, respectively -- will continue to keep top-line earnings consistent.
Solid third-quarter earnings growth should come from the AS/400 division, which has established itself as the leader in the fast-growing Web server space. IBM was No. 1 in Web server sales in July 1998, according to the latest figures from market researcher
. Mike Odierna, the AS/400 unit's worldwide e-business manager, went so far as to challenge anyone "to tell me there is a better, more secure Web server than the AS/400." While many other units are tested externally, adds Odierna, IBM's servers are tested at IBM, so no add-on security products are needed.
analyst Laura Conigliaro notes that AS/400 revenues make up almost 5% of the company's revenues, or close to $1 billion.
Conigliaro -- who is predicting IBM will earn $1.51 per share on revenues of $19 billion -- believes the company is still looking at a healthy market in its key service categories. That's probably why IBM remains on her own recommended list at Goldman, which hasn't participated in any underwriting on IBM.
analyst James Poyner suggests that the third quarter was particularly strong thanks to a number of large contracts IBM secured in its business services segment, including a $3 billion, 10-year contract with
Cable and Wireless
IBM wasn't nearly as successful, however, in its other server segments, says one money manager, who requested anonymity. He argues that the company's position in the Unix and Windows NT workstations is well behind rivals
. The buy-side manager doesn't have a position in IBM, but does have one in Compaq.
"Sun said when it reported
last week that it's gaining share at the expense of H-P and IBM in this business," points out Oppenheimer's Poyner, who lowered his rating on IBM last week from a strong buy to buy. Poyner says he made the rating change because his IBM 12-month price target of 150 was too close to becoming a reality already. (His firm has not acted as an underwriter for IBM.)
The other weak link in IBM's armor concerns the company's PC desktop business. Conigliaro says IBM is busy "off-loading the manufacturing of the business" to companies such as
. But, she says, the company still needs to improve its PC infrastructure even more to increase profit margins in the space.
Oppenheimer surveys during the quarter, notes Poyner, show that IBM was aggressively chopping prices to undercut direct PC makers such as
The good news, adds Poyner, is that the steady price erosion of PC components this year may be ending. "We are seeing the decline in disk drive prices slowing down and this should slow down the PC industry's price-cutting," he explains. IBM is a large high-end disk drive seller itself, so it should see some upside from this development as well.
Overall, IBM's core businesses, such as its services and software units, are doing quite well, while its PC desktop business is not.
But for the time being at least, analysts are still giving IBM the grudging respect it deserves.
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Thomson Company Reports.