IBM’s Profit Rises, Beating Expectations
IBM Corp. rebounded from a previous disappointment by reporting second-quarter earnings Monday that surpassed analysts’ expectations. Improvement in the services division buoyed the results.
In the quarter that ended June 30, IBM showed net income of $1.83 billion, or $1.12 a share, compared with $1.74 billion, or $1.01, a year earlier.
However, that comparison is skewed because the sale of IBM’s personal computer division to China’s Lenovo Group Ltd. closed May 1, lowering the figures IBM posted in the remaining two months of the quarter. Looking only at continuing operations, IBM showed a profit of $1.85 billion, or $1.14 a share.
Second-quarter revenue was $22.27 billion, down 3.6% from $23.1 billion a year earlier. Without the one month of sales in the PC business, IBM’s revenue would have been about $21.7 billion.
Analysts surveyed by Thomson First Call had forecast earnings of $1.03 a share on revenue of $21.96 billion.
“IBM returned to form in this quarter,” Chairman and Chief Executive Sam Palmisano said.
IBM shares fell 57 cents to $81.81 before the earnings report. The stock jumped above $85.50 in after-hours trading.
The second-quarter figures included three big events that Wall Street traditionally discards when assessing a company’s performance. IBM showed a gain of $1.1 billion from the Lenovo sale and a $775-million boost from an antitrust settlement with Microsoft Corp. IBM also took a $1.7-billion charge to account for the elimination of up to 14,500 jobs, primarily in Europe.
The company earlier had said the job cuts would top out at about 13,000. IBM’s chief financial officer, Mark Loughridge, said about half the affected people had already left.
IBM’s numbers were being closely scrutinized for signs that Big Blue overcame the first-quarter problems that then caused earnings of 84 cents a share, or 85 cents on a recurring basis, well short of the 90 cents in analysts’ forecasts.
At the time, some analysts said the gap would have been even bigger had IBM not misled Wall Street about the effect of expensing employee stock options. IBM said last month that the Securities and Exchange Commission was investigating.
One of the weak spots blamed for the first-quarter results was the technology-services division, which provides more than half of revenue. In the second quarter, however, IBM said services revenue increased 6%, or 4% without currency fluctuations. Gross profit margins in the segment also improved, to 26.1% from 24.4% a year earlier.
Services contracts signed in the quarter, another closely watched figure, increased to nearly $15 billion, ending what Loughridge said was six consecutive quarters of declines.
Software revenue increased 10%, 7% without currency shifts. The hardware business, now shorn of the low-margin PC line, saw non-PC revenue increase 5%, or 4% without changes in the value of the dollar.
“Not only has their business bounced back, which was expected, but above and beyond that, they appear to be doing a better job executing, and demand seems to be improving in some areas of their business,” said analyst Richard Petersen of Pacific Crest Securities.
