NEW YORK (CNN/Money) -
IBM reported Wednesday that second-quarter earnings increased 11 percent, excluding charges, on sales that came in a shade above forecasts on Wall Street.
The world's largest computer maker said it earned $1.7 billion, or 97 cents a share, in the quarter, compared with income of $1.5 billion, or 89 cents a share, in the second quarter of 2002.
This year's figure did not include costs related to discontinued operations and last year's earnings excluded a $1.1 billion restructuring charge.
Backing out the discontinued operations, IBM earned 98 cents a share, matching what analysts were expecting, according to First Call.
Sales of $21.6 billion, up 10 percent from $19.7 billion a year ago, were ahead of Wall Street's estimate of $21.4 billion.
Shares of IBM (IBM: Research, Estimates) edged up 30 cents to $86.74 in regular trading Wednesday but fell more than 2.5 percent to $84.50 in after-hours trading, according to Island ECN.
Good, not great
Kimberly Caughey, an analyst for Parker/Hunter, said IBM's results were respectable but not surprising, considering that there is still little evidence of a broad pickup in the economy.
One factor that may limit some enthusiasm was that IBM said revenues would have been just 3 percent higher than a year ago after excluding the effect of currency fluctuations. Multinational companies like IBM have benefited from a weaker dollar. IBM generated more than 56 percent of its sales from outside the U.S. in the second quarter.
"The quality of IBM's earnings haven't been improving," said Michael Mahoney, managing director with EGM Capital, a hedge fund focusing on tech, telecom and media companies.
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In addition, IBM CFO John Joyce issued a guarded outlook for the second half of the year during a conference call. "I don't need to remind investors that second-half economic recoveries were expected in the second half of 2000 and again in 2001," said Joyce.
With that in mind, Joyce said that IBM remains on track to meet current sales and earnings estimates for 2003. Joyce did not mention specific targets for the third quarter. "Current information technology demand is good but not robust," said Joyce.
Analysts expect IBM to report earnings per share of $1.05 for the third quarter and $4.32 a share for the year. On the top line, Wall Street is predicting sales of $21.8 billion in the third quarter and $88.2 billion for the year.
Joyce touched on another concern as well, saying that IBM was cooperating with the Securities and Exchange Commission, which is investigating accounting practices in its Retail Store Solutions division from 2000 and 2001. IBM first disclosed that the SEC was looking at it last month. However, Joyce did not give any indication about how long the probe could last.
Services surge
Breaking things down for the second quarter, it appears that IBM's global services unit, which includes consulting and outsourcing businesses, was the strongest performer for the company. Sales increased 22.8 percent from a year ago, thanks in part to Big Blue's acquisition of PricewaterhouseCooper's consulting arm last year.
Success in this business is seen as especially key for IBM since the division accounted for nearly half of IBM's total sales, is more profitable than its hardware business and also offers more stability since customers typically sign multiyear contracts.
To that end, IBM announced two contract wins in the past two days: an $801 million, eight-year agreement to build and manage a child-support payment tracking system for the state of California; and a deal to manage IT functions for telecom firm Qwest. Terms of the latter deal were not disclosed, but analysts said they expected it to be a 10-year deal worth $1.8 billion to $2 billion.
Looking at other big business lines, IBM's hardware business saw sales drop 1 percent from a year ago while software revenues increased by 6.2 percent.
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