IBM Q2 rises on acquisitions, cost cuts

NEW YORK: IBM said that second-quarter earnings rose as cost cutting and acquisitions of software and computer services companies helped offset weak corporate spending on technology.

IBM met analysts' expectations for earnings but did not beat them, and the stock fell 2.5 percent in after-hours trading.

IBM, based in Armonk, New York, said net profit rose sharply from year-ago results that were hit by a large restructuring charge. Without the charge, second-quarter earnings from continuing operations rose 11 percent.

The company posted a 10 percent rise in revenues, helped by services and software, but much of the increase was due to favorable foreign exchange rates.

The computer company's microelectronics division lost money, and IBM said it does not expect that business to be profitable this year. Analysts said new services contracts were weaker than anticipated.

"The services signings seem to be a touch light," said Sunil Reddy, portfolio manager for Fifth Third Technology Fund, which owns IBM shares. "We were looking for about $12 billion in services signings."

IBM signed $10.7 billion in new services contracts in the second quarter.

In a conference call with analysts, Chief Financial Officer John Joyce described current technology demand as "good, but not robust." He stopped short of calling a recovery in the three-year information technology spending downturn, pointing out that such second-half rebounds had been expected in 2001 and again in 2002.

Joyce said he expects IBM to meet Wall Street sales and profit estimates for 2003, reiterating the outlook he gave in April. Analysts expect 2003 revenue of $88.23 billion and earnings of $4.32 per share, according to Reuters Research, a unit of Reuters Group Plc.

Joyce also said he does not expect IBM's technology group to be profitable this year, in part because of a slow start to production at its new semiconductor plant in East Fishkill, New York. The division lost $111 million in the second quarter.

"It was very discouraging to have a semiconductor loss increase by $100 million sequentially and to hear that it's not going to improve much in the third quarter," Lehman Brothers analyst Dan Niles said. He rates the stock "overweight."

IBM shares fell to $84.50 in after-hours trading from a close of $86.74 on the New York Stock Exchange.

QUARTERLY PROFIT JUMPS

IBM said net profit jumped to $1.7 billion, or 97 cents per share, in the second quarter, compared with a year-ago net profit of $56 million, or 3 cents per share.

The year-ago results included a charge of $1.4 billion to cover job cuts and the cost of exiting money-losing businesses.

IBM said revenues rose to $21.6 billion from $19.65 billion a year earlier. Without the benefits of currency fluctuations, IBM's revenues would have risen only 3 percent.

Software revenues rose 6 percent to $3.5 billion, helped by IBM's purchase of Rational Software earlier this year. Global services revenues rose 23 percent to $10.6 billion, helped by the acquisition of PricewaterhouseCoopers Consulting.

"Clearly, services is the champagne-popping part of the announcement," said Peter Kastner, chief research officer at the Aberdeen Group. "The rest of the party was pretty glum, with revenues at the rate of inflation."

Joyce said that while the services signings were light in the quarter, the company has already signed $3 billion in new deals this quarter and that it is back on track.

IBM reported earnings of 98 cents per share from continuing operations, which exclude the money-losing hard disk drive business that it sold at the end of 2002.

On that basis, analysts had expected the company to report earnings of 98 cents per share on revenue of $21.43 billion, according to Reuters Research, a unit of Reuters Group Plc.

© Reuters