IBM tipped its hand long ago that earnings will fall short of last year's levels, warning analysts during a conference call in January. IBM last saw a year-over-year drop in profits in the second quarter of 1996.
In the call, the world's largest computer company pointed to one-time items like acquisition costs and the extraordinary expenses it incurred in its Nagano Olympics marketing efforts. But there have been other trends at work, some troubling.
One is an industry-wide glut of personal computers, a problem that led to sharp price cuts by PC makers and devastated profits at Compaq. Other issues include a persistently strong U.S. dollar and ongoing economic turmoil in Asia, leaving hopes for booming revenue growth at IBM on hold for at least one more quarter.
Analysts scaled back profit outlooks in the wake of IBM's warning. According to research tracking firm First Call, the average Wall Street estimate of IBM's earnings stood at $1.05 a share, on Friday, a 9 per cent drop from $1.16 last year.
Some expect the company may manage to top the estimate but said a surprise, if forthcoming, was unlikely to stem from an unexpected surge in sales. "I don't think we'll get a great revenue performance this quarter," SoundView Financial analyst, Gary Helmig said. "I believe they will report the $1.06 that I'm forecasting, but they may get there a little differently than I thought."
How IBM is likely to get there, he said, is through cost and expense controls rather than sales growth, which would mirror an industry trend this quarter.
For IBM, lackluster revenue growth remains one of the primary remaining long-term goals of top management now that the company has been restored to sustained profitability. Net income at IBM in 1997 was more than doubled 1994's level, but annual revenue growth chugged along at single-digit rates.
Until then, though, there are some areas that offer reason for optimism, analysts said.
One is that some IBM businesses appeared to more than hold their own, noted Salomon Brothers analyst John Jones. "We believe that IBM's software, PC servers and UNIX RS/6000 servers businesses are doing well," Jones said in a report outlining his view on the quarter.
Jones also cited services as an area of strength and added that, "If it were not for the softness in Asia Pacific, we would be raising our estimates," which stood at $1.06 a share in earnings on revenues of about $17.9bn (£10.6bn).
And currency rates could eventually signal better times ahead. While analysts expect exchange rates will roughly halve the high-single-digit revenue growth that IBM would have managed, the dollar has shown signs of stabilising, boding well for future quarters.
IBM's stock slipped a bit Friday, closing at $107.75 (£64.14), down 6 cents.