IBM tops earnings forecasts
First-quarter revenue in line with expectations; company credits emerging markets, game processors.
By Amanda Cantrell, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - IBM beat Wall Street's earnings projections Tuesday, thanks to strong growth in emerging markets and in processors for gaming systems as well as continuing gains from cost-cutting moves initiated last year.

IBM, the world's largest information technology company, reported first-quarter earnings of $1.08 per share Tuesday, ahead of Wall Street analysts' expectations of $1.05 per share and a 27 percent increase over the same quarter last year. The company reported net income of $1.7 billion, a quarterly profit increase of 22 percent over the year-ago quarter.

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IBM shares rose about 1.4 percent in after-hours trading from Tuesday's closing price of $83.31.

Armonk, N.Y.-based IBM (Research) reported revenue of $20.7 billion, in line with analysts' expectations. Revenue fell 10 percent from last year, when the company still recorded revenue from its PC division, which it sold to Lenovo Group in the second quarter last year.

Excluding the PC business, revenue was flat year over year but up 4 percent when adjusting for currency fluctuations.

The company recorded $11.6 billion in revenue from its Global Services division, which performs outsourcing and other high-tech services, and accounts for about 52 percent of IBM's total revenue, That figure was down 1 percent from a year earlier. The division had $11.4 billion in new contract signings, which bring in future revenue for the company

Wall Street expected $11-12 billion in new services bookings. During the quarter, IBM inked 13 deals larger than $100 million and it ended the quarter with a $111 billion services backlog. The company posted a 5 percent increase in short-term contract signings and a 20 percent increase in longer-term signings.

Revenue for IBM's Business Performance Transformation Services group, its high-margin consulting business, increased 24 percent year over year.

"They were solid results," said Peter Misek, Senior Technology Analyst at Canaccord Adams. "They beat on the bottom line, and I liked the short-term bookings number."

In recent years, IBM has trimmed hardware businesses such as personal computers, monitors and disk drives in favor of higher-margin services and consulting businesses, a move the company says has paid off.

"We have done a lot to reposition our business model on higher valuation solutions... at the same time we've been a strategic acquirer," said Mark Loughridge, senior vice president and chief financial officer for IBM, in a conference call with analysts. "By executing that model, we can generate more consistent cash and earnings over the long term."

IBM CEO Sam Palmisano has made big cost-cutting moves, cutting some 13,000 jobs last year and reorganizing the services division, but the company's stock price has been stuck in a rut.

The company faces the challenges of how to keep growing revenue as a $91 billion company – analysts are expecting growth of about 4 percent this year -- while fending off new competitive challenges from Hewlett-Packard, Microsoft and Sun as well as from offshore companies such as Indian firms.

Indeed, Asia-Pacific revenues declined 21 percent to $4.1 billion, or 2 percent, adjusting for currency and PCs, due in part to ongoing weakness in Japan across several IBM divisions.

"Japan is still a problem; it has been for at least two quarters," said Misek, noting that the weakness persists despite signs that an economic recovery is starting to take hold in that country. "I don't know what the solution is."

Other regions performed better, with IBM posting strong revenue growth in emerging markets. Revenue in India grew 61 percent, while Chinese revenue grew 15 percent. Revenue in Russia grew 48 percent.

First quarter Americas revenue came in at $9 billion, down 3 percent year over year but up 6 percent adjusting for currency and PCs. Revenue from Europe, the Middle East and Africa was $6.7 billion, down 14 percent year over year but up 3 percent when adjusting for currency and PC impact.

Mixed results in mainframes, but chip sales strong

Hardware revenue fell 32 percent to $4.6 billion on mixed results for its mainframe computer lines. Without the PC business, hardware revenue increased 3 percent.

Hardware revenue from the Microelectronics group rose 37 percent thanks to sales of gaming systems that use IBM microprocessors, such as Microsoft's Xbox.

The company increased its software revenue 2 percent, to $3.9 billion, thanks to strong sales of its middleware brands including WebSphere, an e-business program. Middleware sales rose 6 percent. Operating systems revenue declined 12 percent, to $520 million, from the year-earlier quarter.

IBM reported a total gross profit margin of 39.1 percent, compared with 36 percent in the same quarter of 2005. Minus the PC business, gross margin in the year-earlier quarter was 38.7 percent.

IBM ended the first quarter of 2006 with $12.3 billion of cash on hand and returned $3 billion to investors in the quarter.

Loughridge did not offer an outlook for the current quarter during the call, but he said analysts' estimates of $22 billion in revenue and $1.28 billion "look reasonable."

Canaccord's Misek said while he thinks IBM has the potential to offer double-digit earnings growth, top-line growth will remain difficult. Wall Street analysts expect annual revenue to decline 1 percent this year and to increase 4 percent in 2007. But he pointed out that other large-cap tech firms are having the same problem.

"Aside from Google and Apple, it has not been a good time for large-cap tech stocks," he said.

Loughridge announced during the call that the company will hold its annual investor meeting in Bangalore, India on June 6 and 7.

Misek does not own shares of IBM.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.