IBM CFO: 'We could have done better this quarter'

By Suzanne Deffree -- Electronic News, 4/15/2005

Despite Q1 revenue inching up 3 percent year-over-year to $22.9 billion at IBM, Big Blue's CFO Thursday admitted the company could have done better in the hard quarter and said there may be some sizable restructuring activities in the near future.

"First, we had a disappointing quarter in services. Contributing to the shortfall was a decline in short term signings, that impacted not only the total reported signings, but also our revenue and profit performance. Second, we experienced an elongated sales cycle in a few of our product areas – due to both sales execution and customer deferrals. We always have deals that don’t close, but more than a normal level of deals slipped this quarter. Third, while we had good customer acceptance of our new storage products, our results were impacted by late product availability," Mark Loughridge said on the company's Q1 call.

"Overall, we could have done better this quarter. But, we had two soft weeks, following several consecutive quarters of solid performance. We’re taking actions to address the issues, and improve our overall performance."

Loughridge exampled company efforts to address sales execution issues across hardware, software and services; shift investments from low yielding areas to areas of growth; and optimize its operating model to efficient and effective client-facing capabilities.

"Many of these activities were already under way. Given the softness in the last two weeks, we have decided to accelerate these plans. A couple of these actions may require some sizable restructuring activities, primarily designed to move decision making closer to the customer and improve the speed of execution at the customer level, " he said, noting that more detail will come out as Q2 progresses.

The CFO expects that the actions IBM is planning to take in Q2 will start to yield benefits in the second half. "We’re driving to get there a different way, on lower revenue, and more cost and expense savings. Looking forward, we remain committed to our longer-term model to deliver double-digit earnings per share growth."

Q1 Growth

Q1's 3 percent growth was driven by the Americas and Europe/Middle East/Africa, where revenue was up 2 percent and 7 percent to $9.3 billion and $7.7 billion, respectively. IBM's Asia-Pacific revenues grew 1 percent to $5.2 billion, while OEM revenues increased 3 percent to $691 million compared with Q1 2004.

Revenues grew in four of IBM’s five industry sectors in Q1 led by the distribution sector, then the small and medium businesses sector. Big Blue's Engineering & Technology Services unit, which houses its MPU business, saw revenue grow more than 55 percent year-to-year and noted yield stability continuing to improve at the 300mm East Fishkill, N.Y., fab.

"IBM semiconductor technology leads the industry. It is the basis of many of the industries cutting edge semiconductors," Loughridge said. "This quarter we had about $200 million of signings in E&TS, a significant increase over last year."

Total income for the quarter was $1.41 billion, reflecting the adoption of expensing equity compensation, compared with $1.36 billion in Q1 2004, a 3 percent increase, the computing giant said.

Diluted earnings per common share was 85 cents, including the effect of expensing share-based compensation, compared with diluted earnings on a similar basis of 79 cents per share in Q1 2004, up a solid 8 percent.

The company’s total gross profit margin was 36 percent in Q1, including the effect of expensing equity compensation, compared with 35.6 percent in Q1 2004 on a similar basis.