Red Ink Reflects Recession and Restructuring

January 18, 1992

International Business Machines Corp., struggling to reinvent itself amid changing times in the computer industry, yesterday reported a $2.8 billion loss for 1991 - its first annual loss ever.

Buffeted by the global economic slowdown, the company also reported its first year-over-year decline in corporate revenue since 1946, when IBM's principal products were typewriters and adding machines.

Although IBM's core businesses turned a profit in 1991, it was more than erased by two one-time write-offs totaling $5.7 billion, one covering severance pay for 29,000 employees who left the company under voluntary retirement or other inducements, the other covering future health care benefits of retirees. Both had been previously announced but the cost of the work force reductions was somewhat higher than anticipated.

1991 "was a disappointing year," IBM Chairman John F. Akers said in a prepared statement from the company's headquarters in Armonk, N.Y. "We were adversely affected by protracted worldwide economic weakness, competitive pressures and transitions within our product lines."

The poor results had been widely expected on Wall Street, and were slightly better than some analysts expected. As a result, IBM stock was cushioned from the effects of the news: It fell $3 after the announcement, then rebounded to close up 87 1/2 cents, at $96.37 1/2, on the New York Stock Exchange.

Over the past year, IBM has moved dramatically to reposition itself and build a foundation for growth by cutting costs, reducing employment by 29,000 workers, reorganizing operations to make its business units more independent and entering into a landmark agreement with former arch rival Apple Computer Inc. to jointly develop the next generation of personal computers.

At the same time, the company has been forced to cope with a variety of external forces.

The recession has cut deeply into sales. Customers are placing more emphasis on integrated computer systems that combine products from a variety of vendors. And the computer market in general continues to move from a reliance on the mainframe computers that long have been IBM's bread and butter into smaller personal computers and workstations. IBM has less of a technological and competitive edge on these lower-end machines, which also offer less potential for profit because of stiff competition from PC "clones" made by several smaller companies.

This upheaval was reflected on IBM's bottom line in 1991. "They're going through a sea change in their own internals and are hit at the same time by a recession in Europe, a slowdown in Japan ... and a recession in the U.S.," said Ulric Weil, a computer industry analyst at Weil & Co. in Washington. "It's not the best of times for IBM."

"IBM is, in a sense, a microcosm of the industry," said William J. Milton Jr., who follows the company for Brown Brothers Harriman & Co. in New York. "IBM has to be everywhere in the computer industry. They cannot escape an industry downturn."

The combined $5.7 billion in IBM's two huge 1991 write-offs wiped out the company's profit from operations in 1991, leaving the $2.8 billion loss, compared with a $6 billion ($10.51 a share) profit in 1990.

Without the write-offs, IBM had an operating profit of $3.5 billion in 1991. Analysts said that, too, was disappointing, and reflected the forces buffeting the company and the industry.

The company's revenue drop also was steeper than expected. Sales fell 6 percent during the year, to $64.8 billion from $69 billion in 1990.

Much of the revenue decline came in IBM's hardware business, which accounts for 62 percent of the company's sales. Revenue from mainframes, PCs and other equipment fell 11 percent in the year.

Revenue from the company's software operations was up only slightly, but IBM enjoyed a 35 percent increase in its relatively minuscule professional services business of assembling computer systems for customers.

This mixture of revenue changes, analysts said, illustrates the continuing shift in the computer business away from hardware sales and into integrating computer systems.

"The composition of the revenue showed IBM's problems," Weil said. "Hardware, as expected, is declining as a contributor to revenue. IBM is transforming itself, as we speak, more and more into a professional services company - software and professional services."

In the fourth quarter, IBM lost $1.4 billion, compared with a $2.5 billion ($4.30) profit a year earlier. Revenue in the quarter dropped 4 percent, to $22.1 billion from $23.1 billion.

Despite the poor results, analysts said there are signs that IBM is beginning to turn around. Marianne Wolk of Oppenheimer & Co. in New York said IBM slightly fattened its gross profit margins during the quarter, indicating that it may be able to wring more profits out of its smaller revenue stream.

Meanwhile, IBM continues to make changes in its operations to adapt to the turbulent environment in the computer industry, and analysts expect it to cut another 20,000 or so workers and take other cost-saving steps during the year.

The analysts said improvement in the U.S. and global economies during 1992 could revive the company's history of strong profitability.

"Revenue and operating earnings declined in the fourth quarter, but at a lesser rate than in any of the previous quarters of 1991 ... so there is some sign of improvement," Milton said. "What we need is some sort of worldwide economic improvement."

INFO-GRAPHIC,,Twp Caption: A DOUBLE DIP FOR IBM(DATA FROM THIS CHART WAS NOT AVAILABLE.)

Copyright 1992