IBM net dips, but results beat forecasts

Philipp Gollner

SAN FRANCISCO: IBM, the world's largest computer company, on Monday posted a dip in quarterly net profit, but results topped Wall Street expectations as revenue from consulting grew for a second straight quarter.

Chief Financial Officer Mark Loughridge told investors on a conference call he expects the company to deliver double-digit earnings per share growth during the fourth quarter and into next year. IBM shares rose 1.9 percent in after-hours trading.

"Overall it was a solid quarter," said Ed Crotty, managing director at Spectrum Advisory Services Inc. in Atlanta, Georgia, which owns IBM shares. "What they demonstrated is some of the benefits they promised with the restructuring efforts."

IBM is cutting more than 13,000 jobs, or 4 percent of its workforce, with layoffs hitting hardest in Europe. Consulting, the company's biggest revenue generator, slipped earlier this year, but has been rebounding after IBM won a 1.5 billion euros contract with ABN Amro Holding NV of the Netherlands.

"We do have some strong tail winds," Loughridge told an analyst who asked on a conference call whether investors should expect per-share profit of $2.00 in the fourth quarter.

"We also have some head winds," he added, including a strengthening dollar, which hurts revenue and earnings.

BOOSTING FORECASTS

Third-quarter net income dipped 2.5 percent to $1.52 billion, or 94 cents per share, from a restated $1.55 billion, or 92 cents per share, in the year-earlier period, IBM said in a statement. Earnings were held back by a $525 million tax charge for repatriating cash earned overseas.

Excluding one-time items, International Business Machines Corp. of Armonk, New York, said it had a profit of $1.26 per share, beating analysts' average forecast of $1.13 per share, according to Reuters Estimates.

Before the earnings report, analysts on average were expecting IBM to post earnings of $1.87 per share in the fourth quarter, according to Reuters Estimates.

"I would encourage you to roll through the over-achievement from the third (quarter) to your full year" estimates, Loughridge said on the analyst call.

"I suspect what that means is that we should add 13 cents for the full year to our estimates," analyst Peter Misek of Canaccord Capital in Toronto said of Loughridge's forecast. "He's not usually that cryptic."

MODERATE SHARE GAINS

IBM shares had slumped 16 percent this year compared with the 2.5 percent gain of the American Stock Exchange Computer Hardware Index. The shares trade at 15 times 2006 estimated earnings, a discount to competitor Dell Inc.'s 20.4 percent price-to-earnings ratio based on Friday's closing price. Hewlett-Packard Co. also trades at 15 times 2006 projected earnings.

Third-quarter revenue at IBM fell 7.8 percent to $21.5 billion from $23.4 billion a year earlier, reflecting the sale of its PC business to China's Lenovo Group Ltd. in May.

Revenue at IBM's Global Services business, which provides computer consulting and outsourcing to companies, rose 3 percent to $11.7 billion from $11.3 billion a year earlier. It signed $11 billion of new consulting contracts.

Computer hardware revenue, which includes sales of IBM's latest-generation z9 mainframe computers that started shipping in mid-September rose 7 percent to $5.1 billion.

Software, a key profit driver, rose 5 percent to $3.8 billion, with a strong performance from its WebSphere group of "middleware" products that help different software programs work together in corporate data centers.

"The bottom line EPS (earnings per share) beat estimates by a significant margin, although revenues were a tad light," Deutsche Bank analyst Chris Whitmore said.

(Additional reporting by Eric Auchard and Duncan Martell in San Francisco and Anna Driver in New York)