IBM's 4th-Quarter Deficit Hit a Record $5.46 Billion

Operating Loss of $45 Million Is the Company's First; Outlook Remains Poor

By Laurence Hooper, Staff Reporter
The Wall Street Journal

January 20, 1993

International Business Machines Corp. reported its first-ever operating loss, closing out a disastrous year with a record $5.46 billion fourth-quarter deficit.

The showing was slightly worse than IBM had forecast and highlighted the depth of the company's troubles. The narrow $45 million operating loss wasn't as bad as some pessimists' worst fears, but IBM's dismal performance still raised new red flags about the year ahead.

Excluding a $7.2 billion pretax charge in the quarter, taken mostly to pay for a big retrenchment unveiled last month, IBM's operating loss for the period was eight cents a share -- roughly in line with its forecast of break-even results.

Including the enormous charge, IBM's fourth-quarter net loss amounted to $9.57 a share, compared with a restated loss of $1.46 billion, or $2.55 a share, a year earlier. Revenue fell to $19.56 billion from $21.97 billion.

For all of 1992, Big Blue reported a record net loss of $4.97 billion. The loss eclipsed even the $4.45 billion deficit posted by General Motors Corp. for 1991.

With such humbling statistics and no end in sight to the company's troubles, there was little promise that Chairman John Akers would see any relief from angry investors.

A particularly ominous sign about IBM's future, securities analysts said, was that the company's huge minicomputer business faltered in the fourth period and could lose its status as a reliable growth generator. In addition, IBM's successful workstation line lost steam during the quarter after nearly two years of fast growth.

Sales of big mainframe computers slowed even more sharply than expected, accelerating the sudden downturn in IBM's core business. And personal computers continued to show losses as revenue fell, even though shipments rose 50% to record levels.

The company didn't say much about what it expects in 1993, except to repeat its statements about an "unfavorable" outlook for the foreseeable future. "Difficult problems remain ahead for IBM," said Mr. Akers in a statement, citing IBM's familiar afflictions: the fast-changing computer industry and weak economies world-wide.

Mr. Akers tried to accentuate the positive in his report, listing IBM's various efforts to make itself more competitive and saying he is "confident that we are on the right path." But he conceded that the latest results "are not acceptable to us or to our shareholders."

Overall, IBM's equipment sales fell a precipitous 20% from a year earlier, fueling an 11% decline in revenue. That's a startling drop even in tough economic times, since the fourth quarter is traditionally IBM's best period; the showing virtually guarantees that IBM will post another operating loss for the seasonally weak first quarter.

IBM shares initially rose slightly on the report, apparently because it wasn't significantly worse than expected. But the stock quickly settled back to finish at $48.375 a share, down $1.125, in composite trading on the New York Stock Exchange.

For the year, IBM racked up pretax restructuring charges of $11.6 billion to cover massive work force cuts and capacity reductions; its 1992 net loss translated to $8.70 a share, compared with a restated $2.86 billion, or $5.01 a share, in 1991. Revenue dropped slightly, to $64.52 billion from $64.77 billion.

IBM's 1992 results include a $1.9 billion addition to its bottom line for an accounting change regarding income taxes, while its 1991 figures include a $2.26 billion charge for a change involving retirees' medical benefits.

With the price of IBM's shares falling 50% in the past six months -- a $28.5 billion drop in market value -- some angry shareholders already have called for Mr. Akers to surrender at least his chairman's post to an outsider. An IBM spokesman said, however, that Mr. Akers retains the confidence of the board.

IBM's directors are set to meet next week, when analysts expect them to deliver another blow to the company's image by cutting IBM's once-sacrosanct annual dividend of $4.84 a share.

Several analysts said IBM's current share price reflects the assumption that the payout will be sliced roughly in half, giving the stock a return of 5% or so. No significant stock move is likely to occur before investors see whether this scenario is borne out, they added.

But even if the dividend action is exactly as expected, analysts aren't certain about what the impact would be on IBM's share price. "I think Wall Street isn't going to know how to react next week, no matter what happens to the dividend," said Jay Stevens of Dean Witter Reynolds, who thinks a 75% cut in the payout would be good news.

Because of all the negative signals in IBM's latest report, most analysts spent yesterday cutting their 1993 earnings estimates and said there's still plenty of room for the stock to drop. "I don't think the light at the end of the tunnel is clear yet," said Steve Milunovich of Morgan Stanley.

Mr. Milunovich noted that 1993 "doesn't look really good for IBM," particularly compared with other big computer companies that are better focused on growth areas, such as Hewlett-Packard Co., or ones that may have taken their worst lumps, such as Digital Equipment Corp.

While many analysts hadn't finished their calculations, a new consensus on IBM's 1993 profit seemed likely to settle around $2 a share -- down from $2.75 or so before the report. Moreover, most analysts said they expect IBM to take further restructuring charges during 1993, even though the company has said it won't do so unless conditions deteriorate further.

Many analysts' downbeat commentary had to do with IBM's admission that its profit margins would shrink even further in 1993, despite the deep cost cuts already planned. Some of the margin erosion is due to price slashing across the computer industry, but some also relates to the fast-changing nature of IBM: A company that became fat on mainframes and their bloated profits is now betting that its future growth will come from lower-margin services and the cutthroat business in smaller machines.

Indeed, while IBM boasted that its non-hardware sales had risen to account for 48% of total revenue in 1992 from 43% in 1991, the phenomenon was largely due to Big Blue's cratering mainframe sales.

IBM said its weakest results in the fourth quarter came from European operations, followed by its big U.S. business. Both areas posted double-digit percentage declines in revenue. IBM's Asia Pacific region performed slightly better, but still had a drop in revenue.

The company said European weakness was largely responsible for what it described only as a "double-digit" drop in revenue from its AS/400 minicomputer, which in the past had been a lone bright spot. While IBM made a point of saying it remains pleased with the AS/400's performance, analysts said the drop in its sales is worrisome.

Mr. Stevens of Dean Witter said that the machine is still a strong seller in the U.S., where it continues to be a marketshare leader, but that the European decline may be an early sign of trouble. "They're trying to hide behind the weak economies," he said.

IBM plans to introduce a revamped AS/400 family in the middle of next month, which could provide a boost to sales. But the real issue may be a general shift away from proprietary technology such as that in the IBM minicomputer, Mr. Stevens said.

IBM also plans to add to its mainframe and workstation lines next month, making February a key product-introduction period for the company. Mainframes will gain a new high-end model and more power for the price, for example, while IBM will add a "parallel-processing" version of its workstation product that links up many microprocessors to work on a problem.

Despite such moves, analysts said they expect a virtual repetition of sales trends for the various IBM products during 1993: a double-digit decline in mainframes, a slight drop in minicomputers, and slowing growth for workstations -- perhaps to the 30% level of 1992.

In personal computers, IBM expects to continue increasing its shipments through the first quarter, and appears to be regaining market share. But PC prices are still dropping, and IBM's quasi-independent IBM Personal Computer Co. remains unprofitable.

IBM has said it expects to make a profit in PCs for 1993, but analysts said that's a tough target. And even if it happens, said Mr. Milunovich of Morgan Stanley, "it doesn't solve the company's problems."

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