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IBM beats Street in Q2 but Asia takes its toll

IBM beat Wall Street estimates by a penny a share in its second quarter Monday, returning a profit of $1.5bn (£0.
Written by Larry Barrett, Contributor

IBM beat Wall Street estimates by a penny a share in its second quarter Monday, returning a profit of $1.5bn (£0.91bn), or $1.50 a share, on sales of $18.8bn (£11.46bn). IBM shares closed up 1 9/16 to 121 ¾ ahead of the earnings report.

First Call consensus expected IBM to earn $1.49 a share in the quarter. Analysts' estimates ranged between $1.35 a share and $1.52 a share. "Our second quarter and first half results clearly indicate, perhaps more so than at any other time in recent years, the value and strength of IBM's portfolio of businesses," said chief executive Louis Gertsner in a prepared release. "We absorbed three major hits that affected the industry: intense price competition and excess inventory in the PC channel, continued severe price erosion in DRAM chips and the impact of the Asian crisis."

Last quarter, IBM earned $1.03bn (£.62bn), or $1.06 a share, on sales of $17.6bn (£10.73bn). In the second quarter of 1997, it raked in $1.44bn (£.87bn), or $1.43 a share, on sales of $18.8bn (£11.46bn). Although total sales were flat in the quarter, IBM managed to improve sales from its services business by 22 percent versus the year-ago period. Services revenue grew to $5.6bn (£3.41) in the quarter and now represents one-third of the company's total sales.

IBM was hurt not only by declining sales into Asia and pricing competition for its PCs and chips, but also erratic currencies that ate into its profits.

Geographically, IBM improved its sales into North America by 5 percent to $9bn (£5.48bn). Sales into the Asia/Pacific region dipped 13 percent to $3.3bn (£2.01bn) and the Europe/Middle East/Africa region grew 2 percent to $5.8bn (£3.53bn). In the quarter, total hardware sales were $7.5bn (£4.57bn), a decline of 13 percent compared with the second quarter of last year. Software sales jumped 5 percent in the second quarter to $3.2bn (£1.95bn), with particularly strong performance in DB2 database software, AS/400 software, and Tivoli systems management software. The software gross profit margin improved 6 percent.

For the quarter, IBM's overall gross profit margin was 38 percent in the second quarter compared with 39.2 percent in the year-ago period.

IBM shares hit a 52-week high of 129 5/16 in May after trading at only 88 5/8 in October. Sixteen of the 18 institutional investment firms following the stock maintain either a "buy" or "strong buy" recommendation.

Analysts now expect IBM to return a profit of $6.44 a share in the fiscal year.

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