International Business Machines Corp. yesterday reported that its second-quarter earnings dropped 7.7 percent, and Chairman John Akers warned that, "Without an improvement in capital spending in North America, it will be difficult to show earnings growth in 1986."
The world's largest computer company, caught in the grip of an industrywide slump, said its second-quarter profits were $1.3 billion ($2.12 a share), well below the projections of most Wall Street analysts. A Lynch, Jones & Ryan poll of IBM analysts placed the median earnings projection at $2.44 a share. In the 1985 quarter, IBM earned $1.4 billion ($2.30).
Revenue in the latest quarter was 7.3 percent higher, or $12.27 billion vs. $11.43 billion in the second quarter last year.
For the first half of 1986, IBM's earnings were $2.32 billion ($3.77), down from $2.4 billion ($3.91). Worldwide revenue was $22.4 billion, up 5.6 percent from $21.2 billion in the same period last year.
The disappointing report intensified pressure on the stock market, where the Dow Jones industrial average fell 27.98 points as pessimism about the economic outlook spread. IBM was the most active issue on the New York Stock Exchange, losing $3.87 1/2 to close at $139.25 on 2.23 million shares.
"We all thought they would come a bit better," Ulrich Weil, an analyst with the Gartner Group, said of the IBM announcement.
Weil said the size of the earnings drop was particularly surprising because IBM paid a significantly lower tax rate this quarter than it did last quarter.
According to an IBM spokeswoman, the company's tax rate dropped 10 percent from 44.5 percent in the first quarter to 40.2 percent in the second quarter as part of a mathematical adjustment to calculate yearly taxes. Without that lower rate, earnings per share would have dropped below $2.00.
Most ominously, say analysts, IBM's pretax earnings dropped nearly 15 percent -- indicating that the computer company's gross margins are under pressure.
The company recently reduced prices of its Sierra mainframe computers and its personal computers.
"List price no longer means anything anymore," said Weil, who added that IBM is now more willing to negotiate special deals for major customers.
"The only good news from this announcement, if you can call it that, is that revenue came in higher than expected," said Sanford C. Bernstein analyst Rick Martin.
In a statement, IBM reiterated points it made at a recent analysts meeting on why earnings have slumped. The company blamed the "business slowdown in the North American economy that began in 1985."
In particular, "Sluggish capital spending in North America IBM's largest market and uncertainties about U.S. tax reform legislation and transition rules have negatively affected our orders and shipment," Akers said. "Capital spending in countries outside North America is generally more positive," he added. Indeed, those overseas sales, combined with the decline of the dollar, have brightened IBM's earnings picture.
In addition, the company said that sales of its mainframe computers -- the market it dominates -- remain "firm," and IBM has taken steps recently to bolster its less successful line of mid-range computers.
At the National Computer Conference earlier this month, IBM announced more than 100 product enhancements for its new midsize machines, focusing on enabling those machines to exchange data more easily.
According to the Gartner Group's Weil, one bright spot in earnings is that IBM's second-quarter revenue was up 21 percent from the first-quarter level, while net income for the same period jumped 28 percent.