IBM Net Up by 11 Pct as Costs Drop

Posted 19 July 2006 @ 03:04 am EET     Print     Reprint     E-Mail     Comments

SAN FRANCISCO (Reuters) - IBM, the world's largest computer services company, on Tuesday reported higher-than-expected quarterly profit and strong growth in its software business after it cut jobs, sending its shares higher.

IBM said software revenue rose 5 percent, revenue from its Microelectronics unit -- boosted by its microprocessors for gaming consoles -- was up 45 percent, new services contracts were down sharply and services revenue was off slightly from the year-earlier quarter. IBM also said its 2006 earnings per share would be consistent with Wall Street forecasts.

Net income climbed to $2.02 billion, or $1.30 per share, from $1.83 billion, or $1.12 per share, in last year's second quarter. Revenue declined 1.7 percent to $21.9 billion from $22.3 billion, which included $557 million from the PC business that IBM sold to Lenovo Group Ltd. (0992.HK) in May, 2005. Analysts, on average, had forecast second-quarter earnings before exceptional items of $1.29 per share and revenue of $21.9 billion, according to Reuters Estimates. Excluding the divested PC business, revenue rose 1 percent, IBM said. IBM shares rose $1.74, or 2.3 percent, to $76.00 in after-hours trade following the earnings announcement.

"In a market like this where there has been no good news from the world and not a tremendous amount of good news from earnings thus far, investors tend to look at IBM as a hallmark for the economy and the tech industry," said Richard Sichel, chief investment officer of Philadelphia Trust Co. "Given the decent report, the stock can rise on that and add a little bit of optimism to the market in general."

CFO SEES EARNINGS ON TRACK

Chief Financial Officer Mark Loughridge told a conference call that IBM was "on track" to deliver earnings-per-share growth in line with its model. IBM is expected to earn $5.83 per share in 2006 excluding special items, according to the average analyst forecast on Reuters Estimates. "They (IBM) continued to grow earnings nicely without having to move the top line much," said Moors & Cabot analyst Cindy Shaw. "There was very little revenue erosion," she said, referring to the company's sale of its PC business.

Earnings at International Business Machines Corp. of Armonk, New York, have been rising after it cut expenses by slashing about 16,000 jobs and focused on smaller, higher-profit services and consulting contracts, a business that accounts for about half of revenue. IBM also has been helped by sales of microchips for Sony's PlayStation 3 video game console. IBM has teamed with Sony Corp. (6758.T) and Toshiba Corp. (6502.T) in developing "Cell" microprocessors for gaming consoles including PlayStation 3, scheduled for release in Japan in November.

IBM's job cuts, announced in May 2005, saved about $500 million last year and are expected to save $1.3 billion in 2006, the company has said. The company is using part of the savings to invest in other parts of its business, such as software, the most profitable segment. IBM said its software unit produced strong revenue in the quarter, rising 5 percent to $4.24 billion.

SERVICES

IBM on Tuesday said it signed $9.6 billion of services contracts in the second quarter, down sharply from $14.6 billion a year earlier and $11.4 billion in the first quarter. The company, like competitors, has been signing smaller, shorter contracts as customers scale back outsourcing deals. In the second quarter, IBM reported services revenue of $11.9 billion, down 1 percent from a year earlier.

IBM, led by Chief Executive Sam Palmisano, said in June it planned to invest nearly $6 billion over three years to expand its services, hardware, software and research businesses in India, which is the leading outsourcing destination for global companies, according to consultant DiamondCluster International Inc. DiamondCluster attributes the industry slowdown to lower-than-expected cost savings by companies that signed large outsourcing contracts in past years. Shares of IBM have fallen about 11 percent this year, compared with the 1 percent decline of the Standard & Poor's 500 index (^SPX - news) The stock trades at just under 13 times estimated 2006 earnings per share, less than the 16 percent multiple of the Merrill Lynch Tech 100 index.