IBM Service Deals Slower, But Mainframe Sales Up

 NEW YORK, Oct 18 (Reuters) – IBM won fewer technology services deals than expected in the third quarter, sending its shares 3.7 percent lower, although it announced stronger profits and raised its full-year outlook

A decline in services and outsourcing contracts signed in the quarter, a key indicator of future revenue growth, prompted some investors to take profits after the shares hit a historic high of $143.04 earlier in the day.

Many analysts, however, said International Business Machines Corp (NYSE:IBM) was still a solid investment in the long term.

"It’s like an eight-cylinder engine. Even if one is weak the others continue very strongly. And they’re still going have a strong fourth quarter," said Collins Stewart analyst Louis Miscioscia.

IBM’s quarterly net profit rose to $3.6 billion, or $2.82 a share, compared with $3.2 billion, or $2.40 a share, a year earlier. Analysts on average expected earnings per share of $2.75, according to Thomson Reuters I/B/E/S.

It also raised its full-year earnings outlook to "at least $11.40 per share" for the full year, up from its previous forecast of "at least $11.25."

IBM’s services contract signings fell 7 percent to $11 billion in the quarter and outsourcing signings fell 15 percent to less than $6 billion. But IBM also said it won a major services deal with ABN AMRO on Oct. 8, shortly after the quarter closed, a point Miscioscia and other analysts noted.

"If you give them the benefit of the doubt, if that Oct. 8 thing happened 9 days before, you could say no one would’ve looked at the numbers funny. But even if you don’t include that, everything else was still strong," Miscioscia said.

He said the shares could still rise to around $160 over the next several months. They had fallen to $137.60 in extended trading, after closing at $142.83.

HARDWARE STRONG

The strongest performance in the quarter came from IBM’s traditional hardware business. Its "System z" mainframe computer sales rose 15 percent, helped by a new line of products, leading a 3 percent rise in overall revenue.

The company has over the past decade shifted its focus to high-margin software and services from commoditized equipment. It bought PwC Consulting from PricewaterhouseCoopers in 2002, and sold its personal computer business to Lenovo Group Ltd (0992) in 2005.

IBM’s third-quarter net margin rose 1.1 points to 14.8 percent and its increasing profitability has been a key attraction for investors.

But some analysts said hardware should not be taken too lightly, even if it accounts for less than 20 percent of IBM’s revenue, since many clients choose IBM software and services because they also use IBM’s massive data processing equipment.

"Make no mistake, they’ve made a large business transformation to software and IT services, but hardware is still very important to them strategically," said Edward Jones analyst Andy Miedler.

He was also willing to overlook the weakness in services signings, which he said was often volatile and difficult to forecast, adding that the overall business was still strong.

"For them to continue to again raise guidance for 2010 and continue to perform well overall means they’re a company to invest in," he said.

Even with the recent gains, IBM is still trading at around 12.5 times earnings, compared with multiples of around 15 for technology services company Accenture Plc (NYSE:ACN) as well as business software rival Oracle Corp (NASDAQ:ORCL).

IBM has also expects to double its profit by 2015 to at least $20 per share and it plans to spend around $20 billion in acquisitions over the same period.

IBM said it has closed 11 acquisitions in the year to date, spending a total of $3 billion. (Reporting by Ritsuko Ando; editing by Bernard Orr and Andre Grenon)