IBM's chief financial officer said yesterday that an unexpected price war bit into profit margins and dragged down the company's earnings in the first quarter. Earlier in the day, IBM announced earnings per share that were slightly above Wall Street's estimates.
"What we did not fully anticipate three months ago was the extent of the turmoil that our PC business would undergo in the quarter because of extraordinary price pressures," said Lawrence Ricciardi, IBM's senior vice president and CFO, who summed up the period as a "terrible PC pricing environment. We anticipated its occurrence but not its depth," he said to analysts.
Ricciardi said revenues and margins for IBM's PC business were down year to year, but declined to be more specific. At the same time, however, he said IBM planned to meet price cuts by competitors, "we will be very responsive," he said.
The world's largest computer company blamed its profits fall from year-ago levels on a variety of one-time factors, most notably the strong U.S. dollar and economic weakness in Asia. IBM said first-quarter earnings per diluted share were $1.06, against $1.16 a share for the same period the year before, better than the consensus estimate of analysts compiled by First Call, who had put earnings at $1.05 a share. Shares of IBM rose in after-hours trade Monday. The closing price on Monday was $109.56 (£65.21).
Net income fell to $1bn (£0.6bn) compared with $1.2bn (£0.71bn) in the year-earlier period. Revenues increased 2 percent to $17.6bn (£9.9bn). Gross profits fell 1 1/2 points to 36.6 percent because of shortfalls in its hardware and rental and financing operations that offset gains elsewhere.
During the quarter, IBM's Japanese operations declined 7 percent, but Ricciardi said its business has since stabilised. Although Ricciardi said Asia remained "very tough", he did not expect the situation to further deteriorate.
In a prepared statement, IBM Chairman and CEO Louis Gerstner described "an unusual quarter" in which one-time events, including a couple of acquisition charges and expenses associated with Big Blue's presence at the Winter Olympics, reduced earnings. "At the same time, our PC business suffered from a severe price war that was greater than anticipated," he said. "We made the decision to protect our franchise and to compete, and compete strongly. That decision also reduced first-quarter results."