IBM profit rises, sees improved tech spend

Caroline Humer

NEW YORK: IBM reported its sixth consecutive quarterly rise in profit, as strength in computer hardware and services largely shielded it from the shortfalls that hit other technology companies.

International Business Machines Corp.'s earnings beat expectations, and the stock rose slightly even though revenue fell about $100 million shy of analysts' average estimate.

IBM's Chief Financial Officer Mark Loughridge said that the recovery was spotty but still on track and that IBM expects better results from its software division, which had flat sales, during the second half.

"Customer spending continues to improve, though not uniformly across all segments and regions," Loughridge said, adding that he continues to forecast information technology industry growth of about 4 percent to 5 percent, the best since 2000.

IBM, based in Armonk, New York, is often seen as an indicator for the broader technology sector because it sells everything from tiny microchips to computer software and services to extremely powerful mainframe computers.

The world's largest computer company said second-quarter net income rose to $2.0 billion, or $1.16 a share, from $1.7 billion, or 97 cents a share, a year earlier, including items.

Revenue rose to $23.2 billion from $21.6 billion a year earlier.

Analysts expected the company to report earnings of $1.12 a share and revenue of $23.33 billion, according to Reuters Estimates. But some analysts had said in the days leading up to the report that revenue at IBM might be a couple of hundred million dollars below consensus expectations, given weakness at other technology companies.

"While revenue was a little light, we

saw gross margins hold," said Marty Shagrin, a Victory Capital analyst.

EARNINGS BEAT EXPECTATIONS

IBM's earnings beat expectations by 4 cents a share due to higher-than-expected revenue from intellectual property, better profitability in its software division and high growth in its expensive mainframe computers, said John Jones, an analyst at Schwab Soundview Capital Markets.

IBM's report comes after competitors, including the world's largest microprocessor maker Intel Corp., jangled investors' nerves by signaling a rise in inventories. Some 20 software companies also reported shortfalls in recent weeks, saying it was difficult to close deals.

IBM's own software business, which relies on long-term contracts, showed flat sales at $3.5 billion, while software sales were down 4 percent on a constant-currency basis. Loughridge said some transactions did not close during the quarter but the company expects them to close in the third quarter, enabling it to post modest growth.

Sales of computer hardware, including its mainframe servers and data storage systems, rose 12 percent to $7.4 billion. IBM said its mainframe business had improved, increasing delivery of computing power by 75 percent.

Its troubled microelectronics operations posted a profit of $111 million, helped by a $227 million licensing deal with Applied Micro Circuits Corp.

In all, intellectual property sales produced $432 million in income, which Jones said was above his expectations.

IBM's new plant in East Fishkill, New York, has been struggling with production issues, but Loughridge said those problems were waning and production of perfect chips was rising.

Sales of computer services rose 7 percent to $11.3 billion. IBM said it would improve services profitability and revenue during the second half.

The company said it had signed $10 billion in new services contracts, an important indicator of future business. Sanford Bernstein analyst, Toni Sacconaghi had expected new contract signings of $9.5 billion to $11.5 billion.

IBM shares were trading at $84.84 after closing at $84.02 on the New York Stock Exchange.

(Additional reporting by Duncan Martell in San Francisco and Rajiv Vyas in New York)