IBM Buoys Tech Sector

By Reuters  |  Posted 2008-04-17 Email Print this article Print

IBM shares are boosted as Big Blue posts first-quarter net income up 26 percent, and analysts claim the news is good for the overall technology sector.

By Philipp Gollner

SAN FRANCISCO, April 16 (Reuters) - IBM posted stronger-than-expected quarterly results on Wednesday and raised its 2008 outlook, boosting the shares 2.7 percent and sending an encouraging signal about technology earnings in the face of a weak U.S. economy.

International Business Machines Corp's technology services, consulting and software revenues were particularly strong and investors expressed relief a day after microchip maker Intel Corpalso gave an upbeat outlook for the year.

"This is great for the Street, great for technology," said Ted Parrish, co-portfolio manager at Henssler Equity Fund. "IBM is a bellwether for global technology issues, especially the services area."

IBM shares have risen more than 20 percent since its last earnings report in January on investor optimism the company was better sheltered than rivals from the U.S. economic downturn.

The Armonk, New York-based company gets about two-thirds of its revenue from outside the United States and recurring revenue from services and software contracts accounts for about half its business, providing a buffer from sharp turns in the economy.

First-quarter net income rose 26 percent to $2.32 billion, or $1.65 per share, beating the average analyst forecast by 20 cents, according to Reuters Estimates. It raised its full-year earnings-per-share forecast to at least $8.50 per share from at least $8.25 in February.

"The magnitude of the beat was unexpected," said Zach Rosenstock, an analyst at Wayne Hummer Wealth Management. "You're seeing strength in all of their business lines. The U.S. is definitely a drag, but it is only 35 percent of revenues. They have really positioned themselves well for a downturn in the U.S. market."

Profit rose from $1.84 billion, or $1.21 per share, a year earlier, while revenue grew 11 percent to $24.5 billion from $22 billion and topped analysts' average estimate of $23.7 billion.

Currency gains contributed seven percentage points to revenue growth.

IBM's total gross profit margin improved to 41.5 percent from 40.2 percent a year earlier.

IBM, the world's largest technology-services company, said its global reach and strong recurring revenue and profit contributed to the results.

"We feel good about the rest of the year," Chief Executive Samuel Palmisano said in a statement.

IBM Chief Financial Officer Mark Loughridge told analysts on a conference call the second quarter had started well and that IBM could again increase its earnings forecast.

"It depends on the established markets. If they did see an ongoing acceleration, there could be upside," he added.

IBM shares rose to $123.70 in extended trading following the earnings report after closing up 2.8 percent at $120.47 on

Revenue in IBM's global business services unit, which provides consulting on financial management, human resources, business strategy and software applications management, rose 17.4 percent to $4.9 billion.

Revenue in global technology services, which includes outsourcing and management of technology infrastructures, gained 17.2 percent to $9.68 billion.

Software, IBM's most profitable business, had revenue of $4.85 billion, up 14 percent. Sales at IBM's systems and technology business, which includes server and mainframe computers and data storage for companies, fell 6.7 percent to $4.22 billion.

IBM said in February that strong fourth-quarter growth in services contracts lasting a year or less was paying off. IBM said those benefits gave it more confidence in its U.S. business, even as other technology companies were seeing weaker spending amid concern over the U.S. economy.

IBM shares, seen as a safe haven by many investors, have added almost 10 percent this year compared with the Dow Jones Industrial index's .DJI 6.8 percent decline and the Nasdaq Composite Index's .IXIC 14 percent drop through Tuesday. IBM trades at about 14 times expected 2008 earnings per share compared with about 13 for competitor Hewlett-Packard Co.

(Editing by Andre Grenon)


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