Investors Running from Slowing Sales Growth at IBM - TheStreet

Updated from 10/17/00

Shares of

IBM

(IBM) - Get Report

fell as much as 20% Wednesday as investors were forced to rethink their expectations of how much the technology behemoth can grow in the coming quarters.

Deep Blue
Investors evacuate en masse

IBM reported third-quarter earnings generally in line with Wall Street's estimates after the close of regular trading Tuesday. The company said it earned $1.96 billion, or $1.08 a share, in the period. That figure is up from operating income of $1.7 billion, or 90 cents a share, that the company recorded a year ago. Analysts polled by

First Call/Thomson Financial

expected it would earn $1.06 a share.

The problem wasn't on the bottom line, which was propped up by CEO Lou Gerstner's continuing cost-cutting jihad and share repurchases. Total expenses fell 5% from a year ago, while a stock buyback costing about $1.4 billion boosted earnings by about 3 cents a share.

No, the real story was on the top line. IBM's revenue for the third quarter totaled $21.78 billion, a meager 3% higher than the year-ago period and at the low end of analysts' expectations.

IBM offered a few reasons why sales were light. The company's microelectronics business was constrained by a low supply of chips and ceramic substrates used to package those chips. That held down revenue growth by at least two percentage points, the company said. Meanwhile, anticipation over the upcoming

Freeway

mainframe depressed sales of the current

System/390

family of servers. Lastly, software revenue ran into a wall in September as rapid turnover in the company's sales force left it unable to close deals already in the pipeline.

The bloodletting in IBM's stock makes it clear that investors, who remember the difficulties IBM had producing high-end disk drives earlier this year, are out of patience for execution problems at Big Blue. And despite the few positive things the company had to say -- the formerly troubled PC unit was profitable, and new bookings for services totaled a strong $13.1 billion -- the tone of the company's conference call was resoundingly bad.

To begin with, IBM CFO John Joyce noted that the decline of the euro hurt third-quarter earnings to the tune of 1 cent a share. But the fourth quarter could be worse, he said, because the rapid deterioration of that currency didn't give the company time to hedge enough.

But the worst news came from the company's forward outlook. On the fourth-quarter revenue picture, Joyce would merely say that sales growth would be "better than the third quarter." That indicates revenue growth somewhere above 3%, not exactly music to the ears of investors who'd been told by Gerstner in July to expect IBM's long-term sales growth to be in the high-single digits. As for the bottom line, Joyce said the company would "strive to achieve" consensus earnings per share.

It never looks good when you try too hard. Amid a raft of downgrades from analysts, who were taking down estimates for earnings and revenue for both the fourth quarter and 2001 as a whole, the stock was lately down $17.38, or 15.4%, to $95.62.