NEW YORK (CNN/Money) -
IBM reported second-quarter earnings Thursday that beat analysts' estimates on slightly lower-than-expected sales.
But the company reaffirmed analysts' consensus sales and earnings estimates for all of 2004. This could calm investors, who had started expressing doubts about just how strong corporate spending on technology would be in the second half of the year.
Wall Street, which has aired its disappointment with solid earnings from other tech bellwethers in recent days, seemed pleased but not bowled over by the results. Shares of Big Blue rose moderately in post-market trading.
The world's largest technology services company posted income from continuing operations of $2 billion, or $1.16 a share, up 17 percent from the $1.7 billion, or 97 cents a share, a year earlier. Analysts were expecting IBM to report a profit of $1.12 a share, according to Thomson First Call.
Sales at Armonk, N.Y.-based IBM came in at $23.2 billion, up 7 percent from a year earlier but slightly below Wall Street's consensus estimate of $23.35 billion.
Shares of IBM (IBM: Research, Estimates), a Dow component, were up more than 1 percent at one point in after-hours trading but later settled down to finish only modestly higher. The stock closed slightly lower in regular trading on the New York Stock Exchange Thursday.
International Business Machines Corp., like many other large-cap techs, has seen its stock dip recently on fears of slowing profit and sales growth in the tech sector. But IBM's results seemed to indicate that demand remains healthy in several key areas of the tech sector.
Hardware shines, software sags
IBM saw the most strength in its hardware division, with revenues increasing 12.5 percent from a year ago thanks to robust sales of servers, storage systems, and notebook computers.
Big Blue's global services division, which accounts for nearly half of total sales, posted a revenue increase of 6.5 percent from a year ago.
John Rutledge, manager of the Evergreen Technology fund, which owns IBM, said he was most pleased that IBM reported new contract signings of more than $10 billion, which bodes well for its services business.
"This is a pretty solid quarter. There is not much for people to complain about," Rutledge said.
Software sales were a touch lower than a year ago, but gross margins improved slightly. Software is by far IBM's most profitable business.
Still, Todd Campbell, president of E.B. Capital Markets, an independent research firm catering to institutional clients, said he was disappointed by the lack of sales growth and commented that this could further worry investors in software stocks.
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Several software companies catering to large businesses, including Veritas Software, BMC Software and PeopleSoft, have issued warnings over the past week.
But investors might also be encouraged since IBM's sales growth was not influenced as much by favorable exchange rates as in previous quarters. IBM generates most of its sales overseas, so swings in currencies can substantially affect its results.
Total sales in the second quarter rose 4 percent from a year ago, excluding the effect of exchange rates. So currency contributed 3 percentage points of growth. In the first quarter of 2004, IBM reported total annual sales growth of 11 percent -- but 8 points of that was due to the effect of exchange rates.
During a conference call with analysts, IBM CFO Mark Loughridge said IBM's organic growth, which excludes the impact of currency and recent acquisitions, was the highest in several years. Loughridge added that Wall Street's current full year estimates for 2004 are reasonable.
Analysts expect IBM to report earnings per share of $4.95, a 14 percent increase from a year ago. Sales are forecast at $96.3 billion, up 8 percent from last year.
"Customer spending continues to improve," said Loughridge on his first earnings conference call since being named CFO in May. Loughridge succeeded John Joyce, who is now the head of IBM's global services division.
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