NEW YORK (CNN/Money) -
IBM, one of the world's largest technology conglomerates, reported a first-quarter earnings increase that was in line with analysts' expectations and slightly better than anticipated sales, an indication that corporations are starting to increase their tech spending.
But the stock fell more than 3 percent in after hours trading as investors appeared to fret about profit margin erosion in IBM's consulting and outsourcing business.
The Armonk, N.Y.-based company earned $1.6 billion, or 93 cents a share, a 16 percent increase from net income of $1.38 billion, or 79 cents a share a year ago.
Sales rose 11 percent from a year ago, to $22.2 billion, ahead of the consensus estimate of $21.9 billion.
Shares of IBM (IBM: Research, Estimates) inched up 27 cents to $93.97 in regular trading on the New York Stock Exchange Thursday. The Dow component's stock is up slightly year-to-date amid hopes for a broad recovery in corporate technology spending.
Weak dollar helping sales again
The company hinted that big business' appetite for tech products and services was, in fact, improving. IBM reported solid sales gains in its three major business lines: global services, hardware and software.
In a further reflection of IBM's confidence, John Joyce, IBM's chief financial officer, said during a conference call with analysts that Wall Street's consensus earnings estimate of $4.93 a share for 2004 is reasonable. This would be a 13.5 percent increase from 2003's earnings.
The company did not comment on guidance for the second quarter, however. Analysts are forecasting an earnings increase of 15.5 percent from a year ago to $1.12 a share, with sales expected to rise 7.4 percent to $23.2 billion.
IBM also continued to benefit from a relatively weak dollar because 60 percent of its total sales come from outside of the U.S. The company said that sales growth, after excluding the effect of exchange rates, was just 3 percent from a year ago.
"Currency was a big help there. It's hard to get excited about revenues. Three percent growth is not much to shout about," said John Rutledge, manager of the Evergreen Technology fund, which owns IBM shares.
Still, the 3 percent gain was an improvement from the fourth quarter, when IBM reported a sales increase of just 1 percent without the benefit of currency fluctuations.
Steve Paspal, senior analyst with Sovereign Asset Management, a subsidiary of John Hancock Funds that owns shares of IBM, said that even a slight gain in real sales growth would be a good sign.
"Organic growth has always been pretty anemic for IBM," Paspal said. "But it is nice to see IBM finally getting a tailwind."
Services margin slip makes Street feel blue
Digging down a little deeper, profit margins in global services dipped slightly from a year ago. This could be a concern because that division is IBM's largest in terms of revenues. IBM has been bulking up in global services, which includes outsourcing and consulting, because this business has more predictable revenue streams and higher margins than IBM's hardware division.
The company said reported services sales were up 9 percent in the quarter but that revenue in the division only increased by 1 percent once exchange rates were factored out. IBM also reported $10.5 billion in new contract signings in its global services division, but Rutledge said some on Wall Street were hoping for IBM to announce at least $12 billion in bookings.
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Rutledge thinks the reason that IBM didn't hit this more aggressive target is a sign of more intense competition from rivals such as Hewlett-Packard and Accenture as well as an indication that big businesses may still be a little reluctant to commit big dollars to tech projects.
"The economy is getting better, but it's still difficult to get really big servicing contracts," Rutledge said.
However, Joyce said that IBM expects margins in global services to improve for the remainder of the year, adding that demand for services has tended to lag the demand for new hardware and software during a recovery.
Nonetheless, one fund manager said even though IBM should benefit from increased corporate tech spending, Big Blue, because of its massive size, is not the most exciting way to play a rebound in IT demand.
"IBM just doesn't give me the performance I'm looking for in tech," said Knox Fuqua, manager of the AAM Equity fund. "I'm more excited about companies like Intel, Dell, and Cisco." Fuqua said he sold his stake in IBM last month.
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