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IBM shares drop on Q1 results
By Chris Kraeuter, CBS.MarketWatch.com
Last Update: 9:55 AM ET April 16, 2004

SAN FRANCISCO (CBS.MW) -- IBM shares fell Friday morning after the tech giant reported first-quarter profit and sales rose from the same period last year due to beneficial currency moves and improved demand for servers and software.

The results of Armonk, N.Y.-based IBM (IBM: news, chart, profile) met, but did not exceed the expectations of most analysts on Wall Street.

IBM shares shed 2.2 percent to $91.92 in early trading. For the year, shares are flat.

Chief Financial Officer John Joyce said the current consensus targets for profit and sales during 2004 "remain reasonable." Prior to Thursday, analysts expected earnings of $4.93 a share and sales of $95.7 billion, on average, according to Thomson First Call.

Analyst Richard Williams with Summit Analytic Partners repeated a "sell" rating on IBM and targeted currency benefits as a prop to the company and its investors.

"Clearly this is another missed quarter that only managed to scrape by thanks to non-operating, non-sustainable items," Williams told clients on Friday morning.

"While currency gains may ultimately help shareholders, it tends to inflate perceptions regarding the true health of the business and can leave the stock vulnerable to sharp corrections."

Analyst Laura Conigliaro with Goldman Sachs said the second quarter represents a pivotal quarter for IBM to demonstrate its ability to execute.

"While IBM's unexciting performance in the March quarter is unlikely to create sufficient waves to generate relative multiple appreciation, we expect the current quarter to be a 'no excuses' line in the sand," she told clients on Friday morning.

Based on her 2005 earnings target of $5.55 a share, she said shares could accelerate 15 to 23 percent to between $105 and $112.


First quarter

For the quarter ended in March, IBM reported net income of $1.6 billion, or 93 cents a share, and revenue of $22.2 billion. During the same quarter last year, IBM earned $1.4 billion, or 79 cents a share, on sales of $20.1 billion.

Analysts expected earnings of 93 cents a share and sales of $21.93 billion, on average.

Gross margin was 36 percent, down 2.4 percentage points from the fourth quarter and flat with the same quarter one year ago.

IBM's sales rose 11 percent sequentially, but only 3 percent when adjusting for the changes in foreign currencies. See full story from late Thursday.

The pound, euro and yen all appreciated in value against the dollar during the previous three months. IBM expects currency movements to add 4 percentage points to its sales in the second quarter and another four points in the third quarter.

The strongest business segment for IBM was hardware, with sales growth of 16 percent to $6.7 billion. Within this unit, IBM notched greater than 25 percent growth for its zSeries and xSeries servers. On a constant currency basis, hardware sales rose 10 percent.

One weak spot remains IBM's semiconductor operations. The segment, now part of its systems and technology group under the hardware banner, lost $150 million. A $324 million operating profit for servers and other hardware systems offset the loss.