NEW YORK (CNN/Money) -
IBM reported lower-than-expected first-quarter earnings Monday but sales that came in higher than analysts' forecasts. The tech titan also reaffirmed Wall Street's earnings and sales targets for 2003.
The world's largest computer maker reported net income of $1.4 billion, or 79 cents a share, on $20.1 billion in revenue. Analysts were expecting earnings of 80 cents a share and sales of $19.9 billion, according to First Call.
The company posted a profit of $1.3 billion, or 73 cents a share, and sales of $18 billion a year ago, excluding the effects of discontinued operations.
"In the face of an ongoing difficult environment, we delivered another strong quarter and continued to gain share across our strategic businesses," said IBM Chairman Samuel Palmisano in a written statement.
It appears that IBM missed earnings estimates due to higher expenses related to recent acquisitions of PricewaterhouseCoopers Consulting and Rational Software. But during a conference call Monday afternoon, CFO John Joyce said the company is on track to meet full-year revenue and earnings forecasts of $87.8 billion and $4.32 a share.
Joyce did not mention specific targets for the second quarter. Analysts expect Big Blue to earn 99 cents a share on $21.3 billion in sales.
Shares of Armonk, N.Y.-based IBM (IBM: Research, Estimates) gained 1.7 percent Monday, closing at $80.07. The stock rose 0.4 percent in after-hours trading, according to Instinet.
Services strong ... but look out for HP
Sales benefited from stronger currencies abroad, most notably the euro and Japanese yen. Revenue from Europe and Asia accounted for 54 percent of IBM's total sales and sales from these two regions increased by 23 percent and 14 percent, respectively, from a year ago. North American sales increased only 5 percent from last year's first quarter.
IBM's high-margin services business saw a 24 percent increase in sales in the quarter, aided in part by the company's acquisition of PwC Consulting last year. But gross margins slipped from 26 percent a year ago to 24.9 percent.
IBM has been able to gain share from struggling competitor EDS in consulting services. But Hewlett-Packard (HPQ: Research, Estimates) has come on strong as of late. HP recently announced three significant outsourcing contracts, including a $3 billion deal to manage tech operations for consumer products company Procter & Gamble.
Hardware sales fell 1 percent from a year ago, further proof of the pricing pressures faced by manufacturers of PCs and servers. Hardware is IBM's second-biggest business segment. "Services obviously kept them afloat since the PC market is still not good," said Matthew Kelmon, president of Kelmoore Investment Co., which owns some shares of IBM.
Bucking the trend in software
Software sales increased 8 percent from a year ago, however, bucking a negative trend that has been building in that industry. Database software company Oracle, an IBM competitor, issued a warning last month and enterprise software developers Siebel Systems and PeopleSoft followed suit with warnings this month.
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But Adam Adelman, a senior analyst with Philippe Investment Management, a New York-based money management firm, said that IBM's software business has held up better than many of its competitors because it has more long-term contracts and is not as subject to last-minute buying decisions by corporations.
Nonetheless, Joyce said during the conference call that some customers did defer purchases due to the war with Iraq and other concerns.
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