IBM Posts Record Quarter but Warns of Slowdown

NEW YORK — International Business Machines Corp. reported a record second-quarter profit of $1.7 billion on Tuesday, beating Wall Street’s most bullish forecasts, but the company cautioned about a slowdown later this year.

IBM said the earnings amounted to $2.97 a share on sales of $17.5 billion. The performance is more than double IBM’s results in the same quarter of 1994, when it earned $689 million, or $1.14 a share, on sales of $15.3 billion.

IBM analysts, who had forecast about $2.40 a share in profit for the quarter, said the world’s No. 1 computer maker is heading for a record year, despite the yellow flag it raised about its growth pace.

“This was a very good quarter,” Chairman and Chief Executive Louis V. Gerstner Jr. said in a statement. But he added: “Our business improved each quarter last year, which will make year-over-year financial comparisons more difficult as we move into the second half of 1995.

“Also, there are a few signs that demand may be slowing and price pressures increasing in the United States, and a number of key European countries remain sluggish.”

Analysts, who were surprised by IBM’s results, said the company will continue to benefit from a strong outlook for many of its businesses and end the year at an all-time high.

“They should surpass both the peak revenue . . . in 1990 and peak earnings of 1984,” said John Jones of Salomon Bros.

That would be a coup for IBM and Gerstner, who was brought aboard to restructure the company in 1993, erase its red ink and boost its stock price.

The company dramatically slashed employment and closed and sold off assets, but as earnings have soared each quarter, IBM has moved into an expansionary mode. Last month, it bought Lotus Development Corp., a hot software company, in a surprise $3.5-billion takeover. During the third quarter, IBM will absorb the costs of that move. In addition, external factors that have boosted IBM recently, such as currency fluctuations and a stronger U.S. economy, are evaporating.

“Although our merger with Lotus has drawn a lot of attention in recent weeks, we made important strategic progress in the quarter in other areas of IBM as well,” Gerstner said.

IBM’s stock lost 25 cents to end at $107 on the New York Stock Exchange as many investors were selling off high-tech stocks. The stock had traded for less than $50 as recently as two years ago.

Jerome York, IBM’s chief financial officer, said IBM’s personal computer business made “substantial progress” in the second quarter and that its sales grew in the double digits. Its profit margins were almost at the level of its main PC rival, Compaq Computer Corp.

“I’d have to say that I’d give the division a C+ if not a B- for their second-quarter performance,” York said.

As for mainframe computers, York said IBM’s backlog of orders remains strong.

The company’s mainframe business has helped fuel its earnings recovery, but because of pricing pressures, sales have declined from a year ago.

Revenue increased in all geographic areas in the second quarter, the company said.

The company said seven percentage points of its overall 14.2% revenue gain in the quarter was due to the decline in the dollar, which makes foreign currencies worth more in dollar terms.