IBM Shares Fall After Profit Bombshell

Shares International Business Machines (IBM) and other technology companies fell Friday, a day after the No. 1 computer company reported disappointing quarterly results that shook confidence in growth prospects of the tech sector.

Goldman Sachs analyst Laura Conigliaro wrote about IBM's surprise earnings miss: "Implications for most other companies within tech are an obvious negative."

IBM had been expected to report earnings Monday. Instead, it reported Thursday after the market had closed that profits and revenues were up slightly, but earnings per share were 5 cents lower than analysts predicted.

IBM shares closed down $6.94, or 8.3 percent, to $76.70 Friday on the New York Stock Exchange (search), below the previous 52-week low of $81.90, and at it's lowest point since March 12, 2003, when it closed at $75.18.

Sun Microsystems (SUNW) , which reported a lower loss, but slightly lower revenue Thursday, saw its shares drop 30 cents, or 7.6 percent, to $3.66 on the Nasdaq, near the low end of a 52-week range of $3.29 to $5.65.

The bad news in technology has a variety of causes, according to analysts, ranging from rising energy costs, weakness in the European economy and low prices from Dell Inc. (DELL).

Dell's price cuts in Europe helped take away sales from IBM, Conigliaro wrote. But Dell itself is not immune to the sector's troubles. Company executives told analysts at a recent meeting that large business customers are delaying purchases, she wrote.

Dell shares fell 62 cents to $35.56 on the Nasdaq, near the low end of a 52-week range of $32.71 to $42.57. Shares in archrival Hewlett Packard Co. (HPQ) closed down 91 cents, or 4.18 percent, to $20.84 on the NYSE, near the high end of a 52-week range of $16.08 to $23.

Ever-lower costs for computers aren't just Dell's fault. Price cuts are a rule in the industry, but recent declines for some computer gear have been dramatic.

Prices on servers declined 6 percent over the last 12 months, wrote Richard Gardner, an analyst at Citigroup Inc.'s Smith Barney unit, who blamed "relentless deflation in the server industry," for Sun's earnings miss.

The weak dollar may be making things worse.

IBM and other technology companies have benefited from the weak dollar, which makes their goods cheaper and more attractive to European customers. At the same time, every Euro it brings home translates into a wealth of dollars. IBM's revenues were up 3.3 percent in the first quarter, reported Thursday. Without the benefits of currency translation, revenue would have been up only 1 percent.

But what's good for U.S. companies hurts European companies: Their U.S. sales look puny when translated into euros.

As a result, the days of euro-fueled earnings may be waning. European companies dependent on sales in the United States and hurt by the weak dollar have slowed their technology spending, wrote Tom Berquist, an analyst at Citigroup's Smith Barney unit.

IBM said sales in France, Germany, Italy and Japan — countries that account for one-quarter of its sales — were down 5 percent for the quarter.

On a call with analysts Thursday night, Mark Loughridge, the company's chief financial officer, said IBM might undertake a "sizable restructuring."

Most of the restructuring will take place in Europe, The Wall Street Journal reported Thursday, citing people familiar with the matter.

News of the planned restructuring is already out in Europe, analyst Gardner wrote, and that knowledge hurt morale and contributed to lower sales in March. For instance, the company confirmed in March that it would lay off 500 workers in Sweden, almost 9 percent of its work force there, and close most of its operations in five cities.