IBM Earnings: Is the Worst Over for the Technology Sector?By Reuters | Posted 2009-07-17 Email Print
IBM raised its full-year earnings forecast, saying that it has been benefiting from a greater focus on higher margin businesses in software and services. The results, which also benefited from cost cutting, could signal that the worst may be over for the technology sector in this recession, according to analysts.
By Ritsuko Ando
NEW YORK (Reuters) - IBM sharply raised its full-year earnings forecast as it benefits from focusing more on higher-margin businesses in software and services, sending its shares up as much as 3 percent.
The outlook and stronger-than-expected quarterly earnings, coming on the heels of Intel's stellar results this week, may signal that the worst could be over for the hard-hit technology sector, some analysts say.
Others point out that IBM managed to boost profits mainly by cutting costs and decreasing its dependence on hardware -- an area that has bore the brunt of the worldwide downturn in technology spending.
International Business Machines Corp said it now expects 2009 earnings of at least $9.70 per share, up from its previous outlook of $9.20. The company said it was ahead of its plan of achieving $10 to $11 earnings per share in 2010.
"This, combined with Intel's results, is pushing me to be more optimistic," said Kim Caughey, senior analyst at Fort Pitt Capital Group. "Seeing they made it on the bottom line, and were pretty darned close on the top line, it gives me confidence looking at technology in general."
Leading chipmaker Intel unveiled stronger-than-expected earnings and outlook this week, bolstering hopes that the worst of the industry's downturn had passed.
Analysts said IBM's higher outlook took the disappointment out of its lower-than-expected quarterly revenue, which fell 13 percent to $23.3 billion. The market's average forecast had been for $23.5 billion, according to Reuters Estimates.
Net profit for the quarter rose to $3.1 billion from $2.8 billion in the year-ago quarter. Profit per share rose to $2.32 from $1.97, much higher than the average Wall Street forecast of $2.01 per share, according to Reuters Estimates.
"In an unpleasant economic and financial world, these are incredible results," said Mike Holland, chairman of investment firm Holland & Co.
But some analysts say IBM's strong outlook may not necessarily signal improvement for the overall sector, since the stronger profit was largely a result of higher margins rather than sales.
IBM has fared better than many other technology companies over the past year as it focuses on software and services in outsourcing, automation and technology support -- areas that have enjoyed relatively strong demand in the global economic downturn.
Analysts also credit IBM's cost-cutting measures. Sources in March said IBM was cutting about 5,000 jobs in the United States, although the company has also said it was hiring thousands in new business areas like analytics.
"If it was revenue growth, then you could say it was more broad-based," said Fred Weiss, portfolio manager at Atlantic Trust.
"The company was successful at managing the costs well ... so what you have here is margin improvement, which is IBM-specific," Weiss said.
Gross profit margin rose to 45.5 percent from 43.2 percent a year earlier, and Chief Financial Officer Mark Loughridge said there was room for further improvement.
Loughridge said economic conditions remained tough and avoided declaring that the worst was over, although he forecast a boost from U.S. government stimulus plans to encourage discretionary spending and a weakening dollar.
IBM shares briefly rose around 3 percent in extended trade after closing up $3.42, or 3.2 percent, at $110.64 on the New York Stock Exchange. They later settled to around $112.40, up 1.6 percent.
(Additional reporting by Jim Finkle and Robert MacMillan; Editing by Edwin Chan, Richard Chang and Bernard Orr)
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