IBM Posts 5 Percent Revenue Gain
With its crucial computer services business coming up short again, IBM managed
to wow investors with impressive third-quarter sales in its highly profitable
hardware and software lines, including mainframes and Web applications.
The quarterly profit of $2.22 billion reported Tuesday by International Business
Machines Corp. blew past Wall Street projections.
Net earnings for the three months ended Sept. 30 amounted to $1.45 per share.
In the same period last year, IBM earned $1.52 billion, or 94 cents a share,
as the company absorbed a $525 million tax expense on foreign earnings that
were repatriated to the United States.
Wall Street analysts expected a per share profit of $1.35, according to a survey
by Thomson Financial, and IBM's share price rose to a 52-week high following
the report, which came after the close of Tuesday's regular session.
IBM shares rose $2.87, or 3.3 percent, to close at $89.82 Wednesday on the
New York Stock Exchange.
Third-quarter revenue rose 5 percent to $22.62 billion, up from $21.53 billion
a year earlier. Services accounted for $12.02 billion of the tally, an increase
of just 2.7 percent.
But hardware sales improved 8.9 percent to $5.58 billion, driven by a 25 percent
gain in high-end mainframe computers, which typically accounts for roughly a
fifth of the total. Revenue from the software operation, IBM's most profitable
unit, rose 8.5 percent to $4.41 billion.
IBM also said its overall gross profit margin improved a notch to 42 percent,
up from 40.6 percent in last year's third quarter. Likewise, profitability in
software improved to 85.3 percent from a year-ago level of 84.9 percent, while
hardware margins were 37.7 percent, up from 37.1 percent.
"The mainframe revival is especially impressive," said Bob Djurdjevic,
an industry analyst with Annex Research.
Despite the better-than-expected showing, analysts peppered the company's chief
financial officer with questions about another disappointing performance for
the services business, which accounts for more than half of IBM's revenue.
Profit margins from the services business improved to 27.8 percent from 26.1
percent in the year-ago period. But adding to the concerns voiced by analysts,
IBM reported that the unit had signed $10.5 billion in new contracts, down 29
percent from the year-ago period and the second straight disappointing quarter
for that indicator of future revenues.
The tally marked an improvement from this year's second quarter, when there
were $9.6 billion in new contracts, but CFO Mark Loughridge acknowledged that
a number of major deals expected to be finalized by the end of September "slipped
out of the quarter."
"We fully expected to grow our signings more. We just didn't get the deals
closed," Loughridge said in a conference call after the report, noting
that the current quarter's signings should benefit from the delay.
"I want to point out that although revenue growth for services was not
at our objective, it was an improvement from the second quarter to the third
quarter," he said. "We need to continue that momentum."
Djurdjevic said that although the overall backlog of $109 billion in contracts
for future services is down 4 percent from a year ago, "the situation is
actually stabilizing. IBM seems to be losing less business than before, so the
sales shortfall isn't as painful as it had been."
In the first nine months of 2006, IBM earned $5.95 billion, or $3.81 per share.
In the same period last year, earnings totaled $4.75 billion, or $2.90 per share,
a number that also reflects the big tax expense. Revenue so far in 2006 has
totaled $65.17 billion. That's down 2.3 percent from $66.71 billion in the year-ago
period, which included sales from the personal computer business that was sold
to China's Lenovo Group Ltd. during last year's second quarter.