IBM Meets Expectations but Warns of Y2K Problems

The warning sent shares tumbling in after-hours trading.
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International Business Machines

(IBM) - Get Report

reported third-quarter earnings late today that were in line with expectations despite a 1% decrease in hardware revenues.

But the company cautioned that Y2K problems would continue to affect its operations and bottom line in the fourth quarter and early next year.

The disclosure of the looming Y2K problems unnerved investors, sending IBM's shares down as low as 102 in after-hour trading on Instinet. Earlier, the shares finished trading in New York down 1/8 at 107, even though they had been as high as 112 3/4 right before the bell.

IBM said its net income rose 17.9% to $1.76 billion, or 93 cents a diluted share, from $1.49 billion, or 78 cents a share, a year earlier. Revenues rose 5.2% to $21.1 billion from $20.1 billion a year ago.

Excluding one-time gains, the giant computer maker earned 90 cents a diluted share, exactly in line with

First Call/Thomson Financial

analyst estimates. But revenues came in just short of the expected $21.7 billion.

Analysts shrugged off the underwhelming numbers and the weakness in the company's hardware business. After all, "this quarter has been talked about much more than any other quarter because they have tough comparisons with last year," said Jim Berlino, enterprise hardware analyst at

CIBC World Markets

. "IBM's made no secret of the softness in its hardware business and communicated that well to the street."

But "the slowdown in hardware revenues was more excessive than the Street expected," Berlino explained after IBM's conference call with analysts.

He continued, "The numbers are relevant, but what matters most is their guidance going forward into the fourth quarter and next year."

Indeed, Louis V. Gerstner Jr., IBM's chairman and chief executive, noted in a statement that the company had already started to see a Y2K slowdown in the third quarter, which he acknowledged was "decidedly mixed."

"We believe we will continue to feel the effects of the Y2K slowdown in the fourth quarter and into early next year," he said. "However, even though it is difficult to make predictions, next year has the potential to be a very good year for IBM, once we get past any lingering Y2K effects."

Berlino agreed, saying, "The stock will be a little weak for now but we have to look beyond that. After all, IBM won't be plagued by this issue forever."