IBM weathers storm even as sales drop

Computing company posts stronger than expected earnings on shift to software and cost cutting, even as a stronger dollar weighs on revenue.

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By David Goldman, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- International Business Machines posted first-quarter earnings per share Monday that rose more than expected from a year ago, even as sales slipped substantially.

IBM also dismissed rival Oracle's purchase of Sun Microsystems, which IBM had come close to acquiring earlier this month.

Announcing its financial results, IBM said its net income slipped 1% to $2.3 billion or $1.70 per share. Analysts polled by Thomson Reuters forecasted earnings of $1.66 per share. IBM had fewer outstanding shares than at the same point last year.

The diversified tech company said it is ahead of pace to meet its profit goal of $10 to $11 per share by the end of 2010, though it did not budge on previously announced guidance of earnings of $9.20 per share in 2009.

IBM said it believed profit margins would rapidly increase going forward, as $3 billion in cost reductions since 2008 begin to take hold. Big Blue's cost-cutting strategy picked up substantially in the first quarter, as it put more than 9,000 jobs on the block, including 5,000 in the United States last month.

"We've finished most of our work on spending improvements, but most of the benefit is in front of us," said Mark Loughridge, IBM's chief financial officer, on a conference call with analysts. "That makes us even more confident ... that we are well ahead of pace for 2010."

Shares of IBM (IBM, Fortune 500) traded about 2% lower after hours.

Analysts were encouraged that IBM maintained its guidance even as revenue and profit slipped.

"I think overall, IBM's news is definitely encouraging, because we're getting the sense of a bottom here," said Carlos Guillen, tech sector analyst with Wall Street Strategies. "I think their guidance is about right, as it seems to be consistent with other tech companies."

IBM's statement that its profit will begin to quickly improve mirrors outlooks from several other tech companies, including Texas Instruments (TXN, Fortune 500), Intel (INTC, Fortune 500) and Nokia (NOK), which all recently stated that sales and profits were bottoming out.

Revenue sinks on currency fluctuations

Sales for the Armonk, N.Y.-based computer services company fell 11% to $21.7 billion, which missed analysts' forecast of $22.5 billion.

Revenue was dragged by a stronger dollar, as 65% of IBM's business is conducted outside the United States, including a recent focus on expansion into a number of emerging markets. IBM estimates that revenue was down only 4% using constant currency measures.

Sales were down just 7% in IBM's North American region, but dropped 12% in emerging markets and 18% in Europe, the Middle East and Africa.

Still, earnings remained strong, as IBM entered into annuity contracts with its clients, so its revenue stream continues even during the recession.

"IBM continued to perform well in a very difficult economic environment," said Samuel Palmisano, IBM chief executive officer, in a statement. "This was due to our long-term strategic focus: shifting into software and services, divesting of commodity businesses, and creating solutions that help clients reduce cost and conserve capital."

Guillen said the drop in revenue was not surprising, given the dollar's rise. But as the global economy begins to improve, he said IBM's currency problem will lessen.

"The dollar's strengthening is going to hit revenue, but it won't happen for too much longer, given fact that liquidity is increasing at such a high rate," he said. "That would be another sign from IBM that there's a bottom forming."

'Nothing' changed with Oracle-Sun partnership

IBM shrugged off Oracle's (ORCL, Fortune 500) Monday acquisition of Sun Microsystems (JAVA, Fortune 500), saying it will continue to succeed despite a former coveted asset falling into a rival's hands.

"Oracle and Sun have been partnering for two decades, and what's the result? We've picked up 14 points of market share since 2000," said Loughridge. "What's changed? I think nothing. We know Oracle inside-out. We're competing against the same team and winning on the field."

Software giant Oracle's $7.4 billion deal for Sun trumped IBM's reported $7 billion offer. Sun piqued IBM's interest because of its strong open-source software business, but negotiations between Sun and IBM fell through two weeks ago.

IBM said it was confident that by offering a wide array of products and services, including both hardware and software, the company will continue to better weather the economic storm than its competitors.

The company has recently shifted to a stronger focus on software and services as companies moved to so-called cloud computing, in which they rely on off-site servers and storage instead of their own. Accordingly, IBM's systems revenue, which comes from servers and storage that it sells to companies, dropped 23% in the quarter, but software fell just 6%. To top of page

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