IBM Meets 1Q Earnings Forecast

(Boston) Quarterly results from International Business Machines Corp. are falling into a pattern: Despite weak spots in certain geographies or business units, the company manages to hit its targets and increase its overall profitability.

The technology stalwart kept that model going Tuesday as it reported that first-quarter earnings rose 8 percent and matched Wall Street expectations. Investors knocked the stock down after hours, however, perhaps worried about IBM's poor showing in its home market and its decline in services contract signings.

"I wish the services would beat expectations and not meet expectations," said Jane Snorek, an analyst at First American Funds. "I'd like to see some surprises there -- because that drives everything else at the company."

In the first three months of this year, traditionally IBM's slowest quarter, the Armonk, N.Y.-based company earned $1.84 billion, $1.21 per share. In the comparable period last year, IBM showed profits of $1.71 billion, or $1.08 per share.

Analysts surveyed by Thomson Financial were expecting $1.21 a share for the first quarter.

IBM's revenue rose 7 percent to $22 billion, slightly ahead of the analyst forecast of $21.9 billion.

"Overall this was a solid quarter," said Mark Loughridge, IBM's chief financial officer.

But sales would have grown just 4 percent if not for weakness in the dollar. Downdrafts in the U.S. currency can inflate the dollar value of deals done in other currencies.

Also of note is that IBM's weakest geographic segment was its largest: the Americas, where revenue rose only 1 percent, with the United States particularly weak. Analysts said rival services and hardware companies have recently made similar reports, but Loughridge did not blame economic factors. He said IBM needed to improve its domestic sales efforts, particularly to large companies.

The news may have influenced investors who pushed IBM shares down 79 cents to $96.33 in extended trading after the shares closed up 94 cents to $97.12 on the New York Stock Exchange.

Analysts also weren't dazzled that IBM's most closely watched unit, its services division, signed $11.1 billion in contracts in the first quarter, compared with $11.4 billion a year ago.

That figure -- one of Wall Street's favorite barometers for gauging IBM's health -- represents revenue that will be booked over the course of several years. In the first quarter itself, the services division grew 8 percent to $12.4 billion. The gain would have been 4 percent at constant currency rates.

IBM's next-biggest arm, the hardware unit, saw revenue rise 2 percent to $4.5 billion, though it would have been flat if not for currency fluctuations. Mainframe sales were particularly strong, up 12 percent. But the chip-making division dipped 7 percent. IBM has been unable to replace the sales it enjoyed earlier in its cycle of producing chips for the top three video game consoles, made by Nintendo Co., Microsoft Corp. and Sony Corp.

Revenue in software, which accounts for an outsized portion of IBM's profit, grew 9 percent to $4.3 billion, helped by several acquisitions in "middleware" -- the plumbing behind many business computing applications. The gain would have been 5 percent at constant dollar values.

Loughridge said IBM's outlook for the year was unchanged since the last earnings call in January. Analysts expect earnings of $6.72 per share and sales of $95.6 billion.

Andy Miedler, an analyst with Edward Jones & Co., said the quarterly results showed the benefits of IBM's geographic and product diversity, which let the company hit its targets even with a poor showing in the U.S.

"I think it was an OK quarter for them, to meet expectations in a seasonally weak part of the year," Miedler said. "This diversification is a key reason we like the stock, and why we like it in periods of weakness."


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