Bellwether IBM Warns of Earnings Shortfall

Technology giant IBM Corp. warned Monday that it expects to post first-quarter earnings significantly below Wall Street’s expectations--a sign that the technology recession is far from over.

The bellwether technology firm said sales of semiconductors and storage drives were hit hard by lagging demand. IBM’s services and personal computer revenue also suffered, analysts said.

The rare profit warning--IBM’s first since 1991--follows similar red flags from a host of software companies last week and Monday and suggests to analysts that there are still other shoes to drop.

“The tech segment is clearly not recovering yet,” said Rob Enderle, an analyst with Giga Information Group. The question, he said, is, “will the recovery be in 2003 or 2004?”

Armonk, N.Y.-based IBM estimated earnings of 66 cents to 70 cents a share for the quarter ended March 30, on revenue of $18.4 billion to $18.6 billion, compared with analyst expectations of profit of 85 cents on revenue of $19.7 billion. IBM is expected to report first-quarter earnings April 17.

The severity of the shortfall stunned investors. IBM stock fell $9.84, or 10%, to $87.41 on the New York Stock Exchange, the lowest closing price since January 2001.

Spending on hardware and software support services--including costly sales management systems and supply chain software development--fell 3% in the U.S. last year, and is not recovering quickly, according to market analyst group IDC. Such projects may cost millions of dollars and take more than a year to complete.

Outsourcing services--for managing corporate computer networks or Web sites--have fared better, IDC analyst Rebecca Segal said. But the strength of outsourcing reflects a trend of companies cutting back on internal technology purchases and hiring.

Last year PC revenues declined for the first time in more than a decade. That trend will continue this year, according to IDC, pressuring big computer makers such as Hewlett-Packard Co., already suffering from uncertainty generated by its ongoing battle to acquire Compaq Computer Corp.

Compaq said Monday that it would meet analyst projections for a 1-cent-per-share profit in the last quarter, down from 12 cents a year earlier.

Overall corporate spending on new technology products, including server computers that manage networks and telecommunications equipment, also is down sharply.

“All [companies] overspent in the late ‘90s, especially for the year 2000, and the corporate sector will have a slow, arduous recovery,” said David Yoffie, a professor at Harvard Business School.

But analysts said that other factors also may be contributing to the severity of the IBM warning. The Enron Corp. scandal and increased scrutiny of corporate earnings statements by the Securities and Exchange Commission is making companies more conservative in their financial explanations.

“Historically IBM has been known to stretch” to meet analysts’ projections, said Ashok Kumar, a U.S. Bancorp Piper Jaffray analyst. That will be much harder to do in the current climate, he said.

Sam Palmisano, who became IBM’s chief executive on March 1, may want to reset analysts’ perceptions so he can more easily show strong earnings growth going forward, said Harvard business professor Henry Chesbrough. “When [Lou] Gerstner became CEO in early 1993, IBM took the largest write-off in its history,” Chesbrough said. “There was a big lowering of expectations.”

Experts said the underlying problem for technology providers involves a lack of compelling products to create a new cycle of demand. Two traditional stimuli for growth--a new operating system from Microsoft Corp. and a new generation of chips from Intel Corp.--are more than a year away.

Chesbrough warned that when the industry regains its footing, some established players may be in for a rude awakening. “What has helped the tech sector in the U.S. in the last 10 to 15 years has primarily been a wealth of start-ups creating new markets and disrupting established markets,” he said.

He added that today’s tech giants have two alternatives: “Innovate or stagnate.”

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