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19/10/2010

IBM raises guidance as 3Q beats expectations

SAN FRANCISCO – IBM Corp. said Monday that its net income rose 12 percent as it wrung more out of its services and software divisions and gets a lift from a new mainframe computer.

The technology company also raised its profit forecast slightly for the remainder of the year, demonstrating its skill at increasing profits faster than its businesses are growing.

The stock fell, though, apparently on fears about a dip in IBM's outsourcing business. IBM said that business would have grown if a big contract hadn't been signed just after the quarter ended.

IBM earned $3.59 billion, or $2.82 per share, in the July to September period, compared to $3.21 billion, or $2.40 per share, in the same period last year. Analysts on average expected $2.75 per share, according to a poll by Thomson Reuters.

Revenue rose 3 percent to $24.27 billion. Analysts expected $24.13 billion.

The value of the services contracts IBM signed during the quarter fell 7 percent to $11.0 billion. IBM is the world's top technology-services supplier, and its long-term contracts provide a steady source of revenue even in bad times.

A decline in outsourcing deals led to the shortfall. Mark Loughridge, IBM's chief financial officer, said that one large outsourcing deal would have caused overall signings to rise if it had been signed 8 days earlier.

The Armonk, N.Y., company's shares fell 3.7 percent, or $5.22, to $137.61 in extended trading, after the results were reported. They had risen 1.3 percent, or $1.77, to finish the regular trading session at $142.83.

IBM's new guidance calls for net income of at least $11.40 per share this year. The previous guidance was for at least $11.25 per share. Investors have grown accustomed to IBM raising its guidance, but were expecting a smaller bump to $11.30 per share.

IBM's results help Wall Street check in on corporations' appetite for new technologies, though it's a cloudy window.

IBM has had nearly eight years of uninterrupted year-over-year earnings increases, including stretches when sales have dipped. IBM has some unusual characteristics that help it ride out economic slumps, such as its enormous pipeline of long-term service contracts that provide steady revenue even when new sales dry up. IBM's services backlog was $134 billion at the end of the latest quarter, flat with the year before. Cost cuts and stock buybacks are other important ways IBM boosts its profit.

The company faces frequent worries from analysts and investors, though, about its ability to meaningfully improve revenue. That's partly a function of the company's size — it's hard to grow when you're that big. To keep growth going, IBM does lots of acquisitions, with one of the latest being the $1.7 billion takeover of Netezza Corp., which provides "analytics" technologies that help companies predict future trends, such as how price changes affect sales.

IBM's fortunes are no longer tied to its hardware division, as it once was, but the company's mainframes are mainstays in many corporations and offer an unparalleled opening to sell those customers other things, such as services and software, which are now IBM's two biggest businesses. The company's latest mainframe, which was released this summer, is a high-end offering that starts at $1 million and costs more as more processors are added.

The company rescued itself from the brink of collapse by focusing on those businesses while its mainframes were under intense pressure in the 1990s.

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