Fool.com: Big Blue Server Sales Slumping (Breakfast News) October 21, 1999

BREAKFAST WITH THE FOOL

Thursday, October 21, 1999

"A champion is one who gets up when he can't."
-- Jack Dempsey

Big Blue Server Sales Slumping

By Richard McCaffery (TMF Gibson)

Computer hardware, software, and services company IBM (NYSE: IBM) disappointed investors with a slow third quarter as a result of the year 2000 computer glitch, which has kept many companies from making technology purchases until after the millennium.

Big Blue reported earnings of $0.90 per diluted share (minus one-time items), compared to $0.78 a year ago, in line with estimates according to IBES International. But sales rose just 5% to $21.1 billion, up from $20.1 billion a year ago as the Y2K slowdown hurt sales of large servers and operating systems software. In Q3 last year, sales rose 8%.

Louis Gerstner, IBM chairman and chief executive, said he expects the slowdown to continue into the fourth quarter and early next year. After the Y2K shakeout, however, Gerstner said 2000 has the potential to be a very good year.

The year 2000 will soon be just another speck in the rearview mirror for long-term investors, and a few quarters of slower-than-expected sales as a result shouldn't cause anyone to drive off the road. The more serious issue for IBM seems to be the chunk of market share it's losing to competitors like Sun Microsystems (Nasdaq: SUNW), according to The Wall Street Journal.

According to data from market research firm International Data Corp., IBM is giving ground to Sun in the midrange server market, and faces heated competition from its rival in the large server area, the Journal reported. Remember, last week Sun reported superhot results for its fiscal first quarter. Revenue jumped 25% to $3.1 billion and net income rose 39% to $275 million as server sales powered growth. Scott McNealy, Sun's chief executive, said the growth is coming at the expense of competitors like IBM and Hewlett-Packard (NYSE: HWP).

Looking at IBM's income statements, external server sales for the quarter dropped 29% to $1.9 billion, and 11% to $6.4 billion for the year so far. Ouch. IBM has taken steps to strengthen its server, storage, and Web security groups, however, including the recent acquisitions of Sequent Computer, Mylex Corp., and Dascom.

On the bright side, IBM reported strong results in growth areas such as software (other than operating systems), original equipment manufacturing, global services, global financing, and personal systems.

For more on IBM, check out these recent stories:

News to Go

Sunglass, footwear, and athletic equipment manufacturer Oakley (NYSE: OO) is restructuring its footwear business in an effort to curtail net operating losses in the division. Oakley expects to record a $7 million to $10 million charge in the fourth quarter as a result of the plan.

Telephone and broadband services communications provider Qwest Communications (Nasdaq: QWST) plans to offer high-speed local Internet access in four California cities early next year. The cities are Los Angeles, Sacramento, San Diego, and San Jose/San Francisco. Qwest has announced plans for local fiber networks in over 25 U.S. cities.

Direct sales computer manufacturer Gateway (NYSE: GTW) announced record Q3 net income of $113.2 million, a 40% increase over last year, as hardware and Internet services sales soared.

Video store giant Blockbuster (NYSE: BBI) plans to offer movie rentals over the Internet next year in an effort to get up to speed on the e-business highway, The Wall Street Journal reported.

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