*Update* IBM Earns $1.55 a Share, Easily Beating Estimates

First-quarter revenue jumps to $20.3 billion from $17.6 billion a year earlier.
Publish date:


(IBM) - Get Report

put a solid stamp on this shaky first-quarter earnings season, saying it earned $1.5 billion, or $1.55 a share, in the first quarter, handily beating the

First Call

consensus estimate of $1.41 a share.

In the year-earlier period, the company earned $1 billion, or $1.06 a share. Revenue climbed to $20.3 billion from $17.6 billion a year earlier.

The following story was posted at 9:01 a.m. EDT:

At IBM, Software Success Could Temper Hard Times for Hardware

After the drama of



slow implosion, the spotlight in the technology sector falls on


(IBM) - Get Report

first-quarter earnings due out later today.

Ever since late last month, when IBM let it slip in the back pages of its 1998 annual report that it

lost a whopping $992 million in PC sales, there has been a sense of panic in the PC sector. The dire news from Compaq, announcing that it would significantly

miss analyst consensus estimates, did not help matters. The

resignation of Compaq CEO Eckhard Pfeiffer on Sunday only seemed to cement these fears.

IBM's earnings report will go a long way toward helping investors determine whether "Compaq's problems are company-specific or industry-wide," says Danny Lam, director of technology research firm



While IBM's services business should continue to excel, say analysts, Big Blue needs its software unit to offset the perceived shortfall in its PC division. Analysts expect IBM to earn $1.3 billion in profits, or $1.41 per share, up from net income of $1 billion, or $1.06 per share, a year ago. Revenue is expected to hit $19 billion, up 8% from last year's $17.6 billion.

"My contacts are saying

the services business is still doing well, but there have been a ton of misses in the software space," says David Takata, a


analyst and one of the few IBM skeptics on the Street. In terms of gross margins, software was the most successful branch at IBM last year, generating a gross profit margin of 81% on $11.8 billion in revenue in 1998, up from 75% in 1997. Hardware gross profit margins slipped from 36% to 32%, while the margins on services remained flat. So if software sales dip, they could very well take IBM's total profitability down with them.

Takata, who rates IBM a hold, admits the company could very well make its first-quarter numbers, a feeling echoed by most other analysts. Amit Chopra, an analyst with

Credit Suisse First Boston

, says strong unit sales growth in its PC segment should keep IBM healthy in the near term. (CS First Boston and Gruntal do not have underwriting relationships with IBM.)

But Takata, who lowered his rating on IBM in December, is worried about the rest of the year. When analysts worry about the rest of the year, they often mean they are concerned over Y2K spending slowdowns. Arnie Berman,

Soundview Technology Group's

chief strategist, released a report this week warning that the Y2K problem could lead a significant number of companies to "lock down" --that is, significantly reduce -- their information-technology budgets during the second half of the year. "The attitude will be if it ain't broke, don't mess with it," he says.

This mentality could spell trouble for a company such as IBM, whose slow but steady revenue growth depends on providing companies with infrastructure products that come out of its three core divisions. For this quarter at least, investors are looking for solid earnings from Big Blue. An indication from the company that PC sales can become profitable once again will determine whether analysts continue to bet on this supertanker of a stock in the future.

And as any PC investor knows these days, the future can become the present in an awful hurry.