IBM Earnings Down but Beat Expectations

SAN FRANCISCO – International Business Machines Corp. (IBM), the world's largest computer company, Monday posted a dip in quarterly net profit, but results topped Wall Street expectations as its consulting and services business recorded a second straight quarter of improvement.

Chief Financial Officer Mark Loughridge told investors on a conference call he expects the company to deliver double-digit earnings per share growth during the fourth quarter and into next year. IBM shares rose about 1 percent in after-hours trading.

"We do see some strong tail winds," Loughridge said in response to a Wall Street analyst who asked whether a $2.00 per share profit was reasonable to expect for the fourth quarter.

"We also have some head winds," he added.

Third-quarter net income dipped to $1.52 billion, or 94 cents per share, from a restated $1.55 billion, or 92 cents per share, in the year-earlier period, IBM said in a statement. The results included a tax charge for repatriating cash earned overseas.

Excluding one-time items, IBM said it had a profit of $1.26 per share, beating analysts' average forecast of $1.13 per share, according to Reuters Estimates.

"Overall I think it was a solid quarter," Ed Crotty, managing director, Spectrum Advisory Services, Inc., Atlanta, Georgia, which owns IBM shares. "The bookings came through as we expected. I think what they demonstrated is some of the benefits they promised with the restructuring efforts."

In May, IBM said it would cut 13,000 jobs, or about 4 percent of its work force.

Earlier this year, Armonk, New York-based IBM suffered a slowdown in services, which accounts for about half its revenue, but the business improved as IBM began signing a series of multibillion dollar deals.

IBM shares have slumped 16 percent this year compared with the 2.5 percent gain of the American Stock Exchange Computer Hardware Index (search). The shares trade at 15 times 2006 estimated earnings, a discount to competitor Dell Inc.'s (DELL) 20.4 percent price-to-earnings ratio based Friday's closing price. Hewlett-Packard Co. (HPQ) also trades at 15 times 2006 projected earnings.

IBM's stock has outperformed Dell, the world's biggest maker of personal computers, by 7.7 percent this year, while underperforming the Standard & Poor's 500 Index by 14 percent, based Friday's closing prices.

Revenue at IBM fell 7.8 percent to $21.5 billion from $23.4 billion a year earlier, reflecting the sale of its PC business in May.

Revenue at IBM's Global Services business, which provides computer consulting and outsourcing to companies, rose 3 percent to $11.7 billion from $11.3 billion a year earlier.

The services unit, IBM's biggest revenue generator, announced two large contracts in the third quarter, one worth 107 million euros ($129 million) over 10 years from Spain's Banco de Sabadell SA and another worth 1.5 billion euros from ABN AMRO Holding NV of the Netherlands.

Computer hardware revenue, which includes sales of IBM's latest-generation z9 mainframe computers that started shipping in mid-September, without the PC business that IBM sold, rose 7 percent to $5.1 billion.

Software, a key profit driver, rose 5 percent to $3.8 billion, with a strong performance from its WebSphere group of software products that help different software programs work together in corporate data centers.

"The bottom line EPS (earnings per share) beat estimates by a significant margin, although revenues were a tad light," Deutsche Bank analyst Chris Whitmore said. "It looks like they're getting some traction on their restructuring program."

Of 23 analysts who rate the stock, 19 have "buys" or "outperforms," three have "holds" and one has a "sell" recommendation, according to Reuters Estimates, suggesting analysts expect improved performance after the stock slumped earlier this year.