Update: IBM shows Q1 growth but falls short of forecasts

Global Services maintains solid performance

 IBM knocked Wall Street for a loop Thursday by announcing first-quarter earnings significantly short of analysts' expectations, in a report that came two business days ahead of schedule.

IBM said its first-quarter earnings were $0.85 per share, below the $0.90 per share consensus forecast of analysts polled by Thomson First Call. Net income was $1.4 billion, on revenue of $22.9 billion, both up 3 percent from last year's first quarter. Analysts were expecting revenue of $23.6 billion.

"After a strong start, we had difficulty closing transactions in the final weeks of the quarter, especially in countries with soft economic conditions, as well as with short-term Global Services signings," IBM Chief Executive Officer Sam Palmisano said in a written statement. "As a result, we did not achieve all of our goals for the quarter."

IBM's Global Services revenue for the quarter, which ended March 31, came in at $11.7 billion, up 6 percent from last year. Hardware was essentially flat, at $6.7 billion, while software grew 2 percent, to $3.5 billion.

The Global Services unit was hurt by an inability to close some oustanding deals and the decision of some potential customers to delay their purchases until the second quarter, said Mark Loughridge, IBM senior vice president and chief financial officer, on a conference call following IBM's announcement.

However, there are more potential contracts than usual in the Global Services "pipeline," Loughridge said. He expects Global Services to rebound in the second quarter, but declined to give a specific target.

Some analysts were anticipating a shaky quarter. Prudential Equity Group LLC trimmed its revenue forecast last week, citing a shift toward short-term services contracts and challenges to IBM's hardware business. "We believe a combination of enterprise drive constraints, a lumpy start to the new P5 storage cycle, and some modest increase in competition from Dell's new blade server caused hardware to underperform in the quarter," Prudential Equity analyst Steve Fortuna wrote in an April 10 research note.

IBM's hardware business was led by its pSeries servers, which posted a 12 percent increase in revenue. Revenue from its xSeries servers, based on Intel Corp.'s chips, increased by eight percent, while iSeries server revenue increased just one percent after declining in the previous quarter, Loughbridge said.

The storage divsion ran into problems delivering new equipment, and was forced to substitute older storage equipment at steep discounts, Loughridge said. However, revenue still grew by 5 percent, he said.

On the software side, revenue from IBM's middleware products grew 3 percent to $2.8 billion. WebSphere revenue grew by 11 percent while revenue from Tivoli software grew 15 percent, Loughridge said.

While IBM showed growth during the quarter, its wide miss compared to forecasts could bode ill for other companies as quarterly reports begin rolling in. Because of its broad portfolio in software, hardware and services, IBM is often seen as a bellwether for the IT industry.

Siebel Systems ousted Chief Executive Officer Mike Lawrie on Wednesday after disclosing poor first-quarter results, while BMC Software said Monday that it will lay off 12 percent of its workforce after it too came up short of expectations during the quarter. Sun Microsystems Inc. said Thursday its revenue results were below analyst forecasts for the second quarter in a row.

Loughridge warned that IBM might make reductions in certain areas during the second quarter, especially in Europe and Asia; IBM's performance sagged in France, Germany, Italy, and Japan.

Also, the company remains on track to complete the sale of its PC business to Lenovo Group Ltd. in the second quarter, Loughridge said. The Personal Computing Division posted $2.7 billion in revenue, a 3 percent decline, as desktop PC sales slipped, he said.