International Business Machines Corp. (IBM) on Monday posted a flat quarterly net profit, weighed down by a legal settlement, but said fourth-quarter results would be better than expected, and its shares rose 2.3 percent. 

Excluding the costs of the legal settlement, third-quarter earnings exceeded analysts' estimates. The company also said full-year earnings would top Wall Street estimates, indicating that fourth-quarter profit would be better than expected.

Third-quarter net income for the Armonk, New York-based company rose to $1.80 billion, or $1.06 per share, from $1.79 billion, or $1.02 per share, a year-earlier.

Net revenue rose 9 percent to $23.4 billion, squarely in line with Wall Street forecasts, according to a survey by Reuters Estimates. Excluding the benefit of the weak dollar, which boosts the value of overseas sales when they are converted into dollars, revenue grew 5 percent.

Excluding the pension charges, IBM (search) recorded an operating profit of $1.17 a share, driven by improving profit margins in its computer services business as well as its long-struggling semiconductor unit.

The forecasts excluded a pre-tax charge of $320 million, or 11 cents a share, for the partial settlement of employee lawsuits over moves by IBM to revise pensions in the 1990s.

Analysts, on average, had been looking for operating earnings of $1.14 a share, according to Reuters Estimates.

IBM Chief Financial Officer Mark Loughridge (search) said firming demand among customers is helping IBM shrug off economic shocks such as higher oil prices and technology pricing pressures.

"Last quarter, I told you customer spending was improving, though not evenly across all segments and regions," he told investors in a conference call. "In the third quarter, this pattern of moderate expansion continues, with Americas and Asia ahead of Europe."

Loughridge said IBM now expects 2004 earnings of at least $5.00 per share, or 7 cents above full-year forecasts at the start of this year. The higher earnings outlook includes the 3 cent-per-share by which IBM beat third-quarter consensus estimates.

IBM shares rose $1.98 in after-hours trade to $87.90, after closing up $1.07 at $85.92 on the New York Stock Exchange. IBM, a component of the Dow Jones Industrial index, is down 5.1 percent in 2004, compared to a 4.8 percent drop in the Dow.

Hardware Strong, Services Backlog Slows

Revenues from its mainstay Global Services (search) business, including computer maintenance, increased 5 percent, adjusted for currency translation effects, to $11.4 billion in the third quarter. Services accounted for 47 percent of total revenue.

The backlog of future services contracts fell to $110 billion from $118 billion in the fourth quarter, which partly reflected the loss of its marquee customer — J.P. Morgan, which backed out of a seven-year, $5 billion contract.

"Services was a mixed bag," said Marty Shagrin, an analyst at Victory Capital Management, which owns IBM shares. "I think the bar was set fairly low and that's why you're seeing the stock higher," Shagrin said, referring to concerns about profitability and order rates in IBM's services business.

Loughridge said net profit margins in the services business rose to 9.5 percent in the third quarter and would hit 10 percent in the fourth-quarter, helping bolster earnings.

Hardware revenues from continuing operations rose 9 percent, to $7.5 billion, adjusted for currency translation.

Gross profit margin improved to 36.9 percent in the third quarter compared with 36.3 percent a year earlier.