IBM Dashes Recovery Hopes

IBM yesterday shattered fragile hopes for a recovery in the technology market when it warned that revenues in the first quarter would be sharply lower than last year.

The warning was IBM's first in more than a decade and prompted a sell-off of technology stocks across Wall Street and other markets. Investors were also unnerved by news that Iraq was imposing a month-long ban on oil exports as tensions in the area grew.

IBM shares changed hands at up to 11% lower in midday trade at $86.50 (£60.20).

The company said sales for the quarter are expected to be in the range of between $18.4bn and $18.6bn, compared with $21bn in the same period last year. "We expected revenue to miss but not by this much," said Steve Milunovich a computer analyst at Merrill Lynch.

John Joyce, IBM senior vice-president and chief financial officer, blamed a continued decline in spending among its clients. "The business remains very tough," he said. "We saw a continued slowdown in customer buying decisions in the first quarter." He cited "across the board weakness".

The IBM warning has followed a series of similar comments from software firms in the past week. Intel, the world's largest supplier of computer chips, issued a warning in January. But while other technology companies showed obvious signs of suf fering during the slump of the past two years, IBM had managed to keep meeting profit and revenue forecasts. The warning was the first from the company since June 1991.

The computer sector was dragged more than 6% lower by midday on Wall Street with Microsoft, Dell and Hewlett Packard all down.

"I think as far as IT spending is concerned, we are still in a deep recession mode," said John Rutledge, portfolio manager for the Evergreen Technology Fund. "Whether things get better later in the year, we don't know, but clearly the pressure is on IT managers to tighten budgets and IBM is feeling the pain."

Some analysts feared the figures could be evidence of a fal tering recovery in the broader US economy. Figures last week showed the jobless rate creeping higher during March.

Gary Helmig, an analyst at Soundview technologies, said IBM's problems were industrywide. "We have no reason to believe they are not continuing to gain share. We think it is a demand issue, a wide demand issue."

But other analysts were less convinced. Critics have repeatedly questioned the underlying strength of IBM and suggested the company had maintained its growth trajectory through transactions such as the sale of real estate, pension fund gains and tax changes.

In the wake of the Enron accounting scandal, IBM came under intense scrutiny with US reports accusing the firm, known as "Big Blue", of wrongfully accounting for the sale of a division to help the group meet the expectations of Wall Street. The sale had not been recorded as a one-off gain but offset against costs.

IBM argued that it had done nothing wrong but agreed to provide better financial disclosure in future reporting.

The timing of the warning - coming little more than a month after chief executive Sam Palmisario took the reins from Lou Gerstner - was also noted by analysts who said the warning could be part of a "house clearing" exercise.

Mr Gerstner, who remains the company's chairman, won widespread praise during his tenure for turning around the performance of IBM. "It's not clear to us whether the business is getting that much worse or whether this announcement reflects the inclination of the chief executive," said Mr Milunovich at Merrill Lynch. "Management may be inclined to set the earnings expectations lower going forward."

IBM attributed the revised figures in part to its technology group, which makes items such as microchips, semiconductors and storage drives for other companies. Revenues at the division were 35% lower.

Mr Joyce said the company remains committed to "taking actions to improve our competitiveness." On Friday, IBM laid off 600 workers in its global services division.