IE 11 is not supported. For an optimal experience visit our site on another browser.

IBM may restructure after earnings shortfall

International Business Machines Corp. further roiled a queasy week on Wall Street with a surprise announcement that its first-quarter earnings fell below analysts’ expectations, hurt by an inability to close sales and higher pensions expenses.
/ Source: The Associated Press

International Business Machines Corp. further roiled a queasy week on Wall Street with a surprise announcement that its first-quarter earnings fell below analysts’ expectations, hurt by an inability to close sales and higher pensions expenses.

In response, the company on Thursday hinted at a “sizable restructuring,” with a published report saying IBM will slash thousands of jobs in Europe.

The IBM report, initially slated for Monday, comes at a tough time for investors: The Dow Jones Industrial average hit a five-month low Thursday, while the tech-laden Nasdaq Composite Index dropped to its lowest point in six months.

Investors sent IBM shares down nearly 4 percent in the late trading session Thursday, and were poised for further selling on Friday.

“This quarter did not play out as we expected,” said Mark Loughridge, the company’s chief financial officer, who said IBM has begun to address weaknesses in sales.

“A couple of those actions may require some sizable restructuring activities, primarily designed to move decision making closer to the customer,” he said. Details of the restructuring will come within the next three months, he said.

The Wall Street Journal reported late Thursday that IBM plans to cut several thousand jobs in Europe, citing a person familiar with the matter. The company has told employees that it will close two sites in Germany and five in Sweden and transfer the work to lower-cost operations in Eastern Europe, the newspaper reported.

Analysts’ estimates for the second half of the year “remain reasonable,” Loughridge said.

The company’s first-quarter net income rose 3 percent to $1.40 billion, or 84 cents per share, from $1.36 billion, or 79 cents per share, a year ago. Earnings from continuing operations totaled $1.41 billion, or 85 cents per share, including stock-based compensation expenses.

Analysts surveyed by Thomson Financial were looking for the company to earn 90 cents per share on sales of $23.65 billion.

Revenue grew 3.3 percent to $22.91 billion from $22.18 billion last year, driven by the weak dollar. After adjusting for currency translations, sales increased only 1 percent.

IBM said the quarter was going well until the last two weeks in March, when revenue, especially from small transactions, dropped.

Other problems:

  • Sales in Germany, France, Italy and Japan, which account for one-quarter of the company’s revenues, were down 5 percent during the first quarter.
  • Expensing options, which is required by new accounting rules, cost the company 10 cents a share for the quarter.
  • The company has already said increased pension costs will add $1 billion to its spending this year.

Armonk, N.Y.-based IBM had been expected to report quarterly results Monday. The company reported early because “it was the prudent thing to do for investors,” spokesman Edward Barbini said.

Software revenue grew 2 percent to $3.6 billion, with sales of IBM’s middleware brands — which include WebSphere, DB2, Rational, Tivoli and Lotus products — up 3 percent at $2.8 billion. Operating systems revenue decreased 2 percent to $590 million compared with the first quarter of 2004.

Sales again were boosted by the weak dollar. Without it, software revenues would have been flat.

Revenue from Global Services, IBM’s consulting, outsourcing and maintenance services unit, increased 6 percent to $11.7 billion. IBM signed services contracts totaling $10 billion and ended the quarter with an estimated services backlog, including strategic outsourcing, business consulting services, integrated technology services and maintenance, of $110 billion.

Hardware revenue from continuing operations was essentially flat at $6.7 billion. Sales from the company’s systems and technology group totaled $3.9 billion for the quarter, up 2 percent on eServer revenue increases.

Total gross profit margin from continuing operations was 36 percent in the latest first quarter, which includes the effect of expensing equity compensation, compared with 35.6 percent a year ago.

IBM said it ended the first quarter with $8.7 billion of cash.