News

IBM's 2Q Earnings Up 12 Pct.

• By The Associated Press
• July 19, 2007

IBM said Wednesday that strength in its software division and improvement in its services unit helped push profit in the second quarter to $2.26 billion, or $1.55 per share, on revenue of $23.8 billion.

In the comparable period last year, IBM earned $2.02 billion, or $1.30 per share, on revenue of $21.9 billion.

IBM's shares had surged to multiyear highs this week when some analysts predicted that the quarterly results would exceed Wall Street's forecast. Even with such high expectations built in, IBM stock jumped more than 4 percent, up $4.88, to $115.96 at the open of trading Thursday.

This year's quarterly numbers were boosted $81 million, or 5 cents per share, from the sale of IBM's printing division to Ricoh Co. Without that gain, IBM would have seen net profit rise 8 percent, and it would have earned $1.50 per share, beating the estimate of $1.47 expected by analysts surveyed by Thomson Financial.

IBM also surpassed analysts' revenue forecast of $23.1 billion. The sales growth amounted to 9 percent, which IBM called its best quarterly bump since 2001. It would have been 6 percent if not for weakness in the dollar, however.

Analysts were encouraged to see profit margins tick upward slightly, which IBM credited mainly to new operational efficiencies but also to an increase in higher-value sales. That is one reflection of the increased contribution of software, which generates blistering profit margins, in today's IBM.

The Armonk, N.Y.-based company registered healthy growth in each of its major geographic regions, overcoming a stumble in the prior period in the U.S. IBM's chief financial officer, Mark Loughridge, said some of the credit goes to improving domestic economic conditions.

"This was a really strong quarter, close to firing on all cylinders," Loughridge told analysts on a conference call. Later he added, "I think every CFO waits for a quarter like this one."

He slightly increased IBM's guidance for the rest of the year, saying earnings per share would likely rise 14 percent to 15 percent in 2007; his last forecast was an improvement of 13 percent to 14 percent.

"The most important parts of the business are really doing really well for IBM," said Bob Djurdjevic, an analyst with Annex Research. "For the first time in years, it's really evident this big colossus is moving at a fast rate."

One common gauge of IBM's health is services contract signings, because it foretells huge chunks of revenue that will be booked in future quarters. IBM inked $11.7 billion in services contracts in the second quarter, compared with an unusually soft $9.6 billion a year ago.

Revenue actually booked in the second quarter rose 10 percent to $13.1 billion. That would have been 7 percent if not for the weak dollar.

IBM's hardware division saw revenue rise 2 percent to $5.1 billion, though it would have been flat without currency fluctuations. Sales of IBM's key mainframe computers were up only 1 percent in real terms, and chip sales continued to flounder as IBM comes down in the cycle of producing processors for the top three video game consoles.

Because software accounts for an outsized portion of IBM's profit, the company has made dozens of acquisitions to bolster its security and business-management offerings, including this week's $161 million deal for DataMirror Corp.

Software revenue grew 13 percent to $4.8 billion in the second quarter, and pre-tax profit was up 8 percent to $1.25 billion, just below what the much bigger services arm generated. Software's sales growth would have been 9 percent at constant currency rates.

In the first six months of the year, IBM earned $4.11 billion, or $2.75 per share, with revenue of $45.8 billion. Those numbers all rose from the first half of 2006, when IBM showed profit of $3.73 billion, or $2.37 per share, and revenue of $42.5 billion.