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Operating Income Jumps Despite Flat Computer Sales; Lotus Buy Brings Loss

October 17, 1995

NEW YORK (AP) _ IBM’s third-quarter operating profit rose healthily but the company experienced its first loss in two years after taking a special charge to help pay for its acquisition of Lotus Development Corp.

Computer sales were flat during the July-September period, International Business Machines Corp. said today. And it said more job cuts are planned during the next few months, resulting in another special charge.

IBM took a $1.8 billion charge related to its $3.5 billion deal for Lotus, which closed in July and is the largest acquisition ever in the software industry.

The charge led the company to post a loss of $538 million, or 96 cents a share. It was the first loss for IBM since the third quarter of 1993.

Without the charge, IBM would have earned $1.3 billion, or $2.30 a share. The company earned $710 million, or $1.18 a share, in the third quarter a year ago.

Revenue was $16.8 billion, up 9 percent from $15.4 billion in the third quarter of 1994.

Excluding the charge, IBM’s performance came in at the low end of the range of analysts’ forecasts. The company’s stock was down $1.50 to $92.50 at midday on the New York Stock Exchange.

IBM chairman Louis V. Gerstner Jr. termed computer sales ``disappointing″ but said the breadth of IBM’s product line allowed the company to report ``good results overall.″

Later in the morning, IBM’s new chief financial officer Richard Thoman told financial analysts he would give the company a ``B″ for the quarter but said he would grade more harshly in the future.

``In terms of growing revenue ... we’re not hitting on all cylinders yet,″ Thoman said.

Revenue grew from software, services and consulting and in the manufacturing IBM performs for other computer companies. In addition, currency fluctuations had less of an impact on revenue growth than during the year’s first two quarters.

Though less regarded as a bellwether stock than in the past, IBM’s results suggested underlying strength in demand for computer products. Its slight drop in hardware sales, to $7.745 billion from $7.753 billion a year ago, was attributed to a supplier-influenced delay in meeting orders for mainframes.

The company’s report came as Intel Corp., the leading maker of microprocessors, and Compaq Computer Corp., the top personal computer maker, reported strong performance gains.

At IBM, sales of PCs and workstations rose but minicomputers sales dipped as the company shifted to a new product line.

IBM reported a 2 percent drop in expenses, excluding the special charge for Lotus. Nonetheless, the company said it anticipates ``limited″ job cuts during the fourth quarter, ending a year of work force stability that had contrasted sharply with eight consecutive years of reductions. The cuts will be paid for with an $800 million charge in the quarter.

IBM’s gross profit margin, which is closely watched by analysts, was 41.3 percent in the third quarter compared to 39.9 percent a year ago. It was 42.4 percent in the first quarter and 43.5 percent in the second.

The drop is a sign the company relied more heavily on less profitable items, such as personal computers, to make money in the latest quarter.

Sales of higher-margin mainframes were pinched by a supplier’s inability to keep up with demand for a key component. IBM in September said the problem had forced it to delay filling orders for a new line of mainframes. Executives said at the time the company should be able to catch up on the orders in the fourth quarter.

IBM determined a $1.8 billion charge was necessary to cover assets of Lotus that do not meet accounting practice definitions of ``completed technology.″ The valuation was reached in consultation with Lotus executives and independent auditors.

The actual acquisition of Lotus was chiefly paid from IBM’s cash holdings, which were $7 billion at the end of the quarter compared to $10.6 billion at the start of the year.

For the first nine months of the year, IBM earned $2.47 billion, or $4.19 per share, including the Lotus charge. Without the charge, IBM would have earned $4.31 billion, or $7.39 per share.

That’s compared to a profit of $1.79 billion, or $2.96 per share, in the first nine months of 1994.

Year-to-date revenue was $50.0 billion, up 13 percent from $44.1 billion in 1994.

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