IBM net climbs 22 p.c on lower costs

By Philipp Gollner

SAN FRANCISCO (Reuters) - IBM, the world's biggest computer-services company,

has said that its quarterly profit rose 22 percent on lower costs and strong

sales of advanced microprocessors for video game machines.

The results beat consensus forecasts from analysts and the company said it

expected 2006 earnings to be "consistent" with analysts' estimates.

IBM shares rose 1.4 percent in after-hours trade following the earnings report.

"It looked like a solid quarter," said Chris Whitmore, an analyst

at Deutsche Bank Securities who has a "buy" rating on the stock.

"Revenues came in slightly ahead of consensus."

"EPS were also a few pennies above expectations and they reported a

solid bookings number in the services business, so the initial take looks

positive."

Expenses fell 9.5 percent after International Business Machines Corp. cut

about 15,000 jobs last year and set out on a strategy to focus on higher-profit

businesses, such as consulting, outsourcing, business software and high-end

microprocessors.

In 2005, IBM sold its unprofitable PC business to China's Lenovo Group Ltd.

and in 2002 sold its disk-drive business to Hitachi Ltd.

IBM said first-quarter net income rose to $1.71 billion, or $1.08 per share,

from $1.4 billion, or 84 cents per share, a year earlier. Revenue fell to $20.7

billion from $22.9 billion, mainly reflecting the sale of its PC business.

Net income was 3 cents a share higher than analysts' average estimate of

$1.05 per share, according to Reuters Estimates. Revenue also was slightly

better than the average forecast of $20.6 billion.

"Given our start to the year, we are on track to deliver EPS growth in

line with the IBM model," Chief Financial Officer Mark Loughridge said on a

conference call with analysts, implying a double-digit percentage increase.

"This is consistent with the average of your estimates for the year."

Loughridge said he was "quite confident" about the rest of the

year. Analysts saw 2006 earnings per share at $5.81 and revenue of $90.6

billion, according to Reuters Estimates. That compared with net income of $4.91

per share in 2005.

MARGINS UP

IBM said sales from its global services business, its largest unit, fell 1.2

percent to $11.6 billion, but the division's gross profit margin rose to 26.6

percent from 24.3 percent as the company focused on more profitable, smaller

deals.

IBM signed services contracts worth $11.4 billion, compared with $11.5

billion in the quarter ended Dec. 31.

Revenue from software, IBM's most profitable business, rose 2.4 percent to

$3.91 billion, while the business's gross profit margin increased to 84.2

percent from 83.8 percent. IBM, based in Armonk, New York, is the world's

second-largest software maker after Microsoft Corp.

IBM, which derives about half its revenue from information-technology

consulting and outsourcing, has been boosting profit after it cut about 15,000

services jobs last year and began selling advanced microchips for Sony Corp.'s

PlayStation 3 game console, according to analysts.

"Things are very profitable at IBM," said Marc Heilweil, chief

executive of Spectrum Advisory Services. "There aren't too many companies

of that size that are earning over 7 percent return on their equity."

IBM shares, down 3 percent in the past 12 months, trade at about 14 times

estimated 2006 earnings per share, a discount to competitor Dell Inc.'s 18

multiple and Hewlett-Packard Co.'s 17.

Computer hardware revenue, including IBM's z-series of large mainframe

computers, fell 32 percent to $4.57 billion after the company sold its PC

business. Not including the PC unit, hardware revenue increased 3 percent, IBM

said.

Microelectronics revenue was up 37 percent, helped by sales of sophisticated

"Cell" processors developed with Toshiba Corp. and Sony for gaming

consoles including Sony's PlayStation 3, scheduled for release in Japan in

November.

IBM's shares rose $1.19, or 1.4 percent, to $84.50 in after-hours trade on

Inet following the earnings report.

(Additional reporting by Yinka Adegoke in New York and Susan Zeidler in Los

Angeles)