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Yahoo! News Business Tuesday January 18, 7:23 AM Investors brace for IBM report, Y2K pickup ahead By Eric Auchard NEW YORK, Jan 17 (Reuters) - International Business Machines Corp. , the worst bitten among major computer makers by the Year 2000 computer bug, is set to post lower fourth-quarter earnings on Wednesday, but may provide clues to when a rebound in spending could once again power its results. The world's largest maker of computer hardware, software and services is set to report results for the fourth quarter and year after the stock market closes Wednesday. Financial analysts are looking for the Armonk, N.Y.-based company to post earnings of $1.06 per share, 14 percent below the $1.24 per share posted a year-ago. The estimates reflect lower guidance IBM gave in meetings with analysts in October and again in December. IBM officials have blamed the shortfall on a spending pause on business computer systems by some large corporate customers as they sought to avert potential millennium bug computer crashes. Such delays could stretch into first quarter 2000, they have cautioned. "This is the hardest one to call because expectations are generally low as a result of its cautious guidance back in October," Bear Stearns analyst Andy Neff said of the difficulty in predicting IBM's results relative to other computer makers. "The company's agenda is to keep expectations low so that meeting expectations is perceived as a victory," the analyst said in a research note to clients published over the weekend. This view of IBM's game plan is widely shared by other Wall Street analysts. "With Y2K passing uneventfully, spending freezes could end sooner in Q1 (first quarter) than expected," Goldman Sachs analyst Laura Conigliaro said last week. "This raises the potential of Q1 upside for IBM," she said, referring to the possibility that first quarter results will handily beat the lowered expectations the company had set previously. In anticipation that IBM may have been overly conservative in its financial guidance, shares of IBM have recovered from their sharp fall they took after the October warning sent the stock down to around $90. On Friday, the stock had rebounded to $119.75, recovering entirely from the third quarter sell-off. Total fourth-quarter revenues are expected to come in slightly below the year-ago quarter's $25.1 billion in reported revenue, many analysts have predicted. But revenues are expected to pick up momentum as the year 2000 progresses. The impact of the long-anticipated "Y2K threat" to computer makers was felt mainly among suppliers of mainframe computers and software to run them, with IBM, the world's largest maker of mainframes, the hardest hit. The pain was shared by Unisys Corp. , another supplier of mainframe-class computers, and software makers like BMC Software Inc. whose programs run on IBM machines. Analysts believe IBM results will be dragged down especially by mainframe sales, which are expected to be around $650 million, or more than 50 percent below 1998's fourth quarter, when a new generation of mainframes buoyed results. Meanwhile, revenue from IBM's flagging AS/400 minicomputer line could see a similar percentage drop to around $500 million, Salomon Smith Barney analyst John Jones forecast. Overall, hardware revenues could fall more than 10 percent to around $10 billion in the fourth quarter versus a year ago, according to both Conigliaro and Jones. In recent years, IBM hardware revenues had been growing in the high single-digits, reaching the low double-digits during the 1999 first half -- a higher rate than historically true of IBM, but one which it has pledged to sustain for the long-run. Compensating only partly for this shortfall in hardware sales is IBM's computer services business -- now accounting for one-third of the company's total revenues. But Jones sees services growing only around 8 percent after the sale of IBM's Internet network business to AT&T Corp. last fall. This is well below the strong double-digit growth pattern that powered IBM's overall results in recent years. In personal computers, revenue from IBM's desktop and mobile computer business is forecast to decline to around $3.6 billion. But IBM's PC servers -- computers used to manage networks of other PCs -- should prove a bright spot, growing 50 percent or so to around $830 million, Jones forecasted. Another highlight in an otherwise dismal quarter should be IBM's booming technology component supply business, which should generate around $2.5 billion in revenue, a rise of more than 25 percent from the 1998 fourth quarter, analysts said. Hard disk drives will account for almost $1.5 billion, or the lion's share of these sales, while computer chips sales should produce around $850 million, a 55 percent jump. Looking ahead, most analysts see IBM positioned for a major rebound during the coming year. "The Fortune 500 companies are expected to play catch up in 2000 with the 'dot com' companies," Jones said. "IBM's services, software and server offerings should be a big beneficiary," he said.

-- hzlz (mph@netbox.org), January 18, 2000