IBM earnings beat; stock tumbles

NEW YORK (CNNMoney.com) -- IBM, the world's largest technology services company, reported higher fourth-quarter earnings Thursday that slightly exceeded analyst projections.

But shares of IBM (Charts) fell 5.5 percent in after-hours trade as investors had hoped for more from the company.

The company reported profits of $2.20 per share, excluding a benefit related to a lower tax rate, compared to the $2.19 which analysts had expected.

IBM earned $2.11 per share a year ago, in which the company took a 10 cent per share one-time charge.

On a net basis, the company reported income of $3.54 billion, or $2.31 per share, compared to $3.19 billion, or $1.99 per share, in the fourth quarter last year.

The company reported revenues of $26.3 billion for 2006's fiscal fourth quarter, compared to analyst expectations of $25.66 billion. Revenue was up 7 percent from last year, when IBM earned $24.43 billion in the fourth quarter.

For its technology consulting business, IBM signed contracts totaling $17.8 billion in the quarter, up 55 percent from the year-ago quarter.

"We had a terrific quarter and a good year with record cash performance, profit and EPS, as well as record payouts to shareholders," said Samuel Palmisano, IBM's CEO, in a statement. "We are well-positioned in the growth areas of a changing IT industry, focused on our evolving business model, and poised for long-term success for our clients and shareholders."

The software segment showed particular strength, with a sales increase of 14 percent compared to the year-ago quarter. The division made $5.6 billion in the quarter.

IBM has been rapidly expanding its high-margin software business in the last year. A majority of the company's 11 recent acquisitions have been in the software arena.

"We've quickly integrated our new acquisitions into our global reach," said IBM CFO Mark Loughridge on the earnings call. "In 2006 we created a more sustainable global business."

An analyst said that software was the standout business this quarter.

"Software was really strong, and they've clearly integrated the acquisitions very well," said Doug Christopher, an analyst with Crowell, Weedon & Co. "If you really get the software right, as we saw in Microsoft's rise, then you're talking about a huge opportunity."

The strength of the division was evident in the fact that it brought in 40 percent of pre-tax margins, he said.

"Plus their suite of products is unmatched amongst their competitors," he added. "I think this is a company demonstrating that they have equal strength in software and hardware, and I think that's going to be a powerful offering to their customers in coming years."

For the service-oriented Global Services business, revenue rose 7 percent to $8.6 billion.

Recently, IBM together with Siemens won a major contract from the Germany military worth $9.3 billion over 10 years.

In IBM's hardware business, revenues rose 3 percent to $7.1 billion for the quarter.

Shares of IBM closed Friday at $99.45 on the New York Stock Exchange.

Doug Christopher does not own shares in IBM. His firm, Crowell, Weedon & Co., owns shares in the company.

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