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IBM Earnings Rise, Beat Forecasts, but Sales Disappoint

CNBC.com and Wires
Monday, 19 Jul 2010 | 5:39 PM ET

IBM reported a higher profit that exceeded what Wall Street was expecting, but the company's shares lost ground in extended trading as its revenue was lighter than forecast and a decline in services contract signings damaged investors' confidence.

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While firm growth in the company's higher-margin software unit and sales in emerging markets bolstered profit, the results were not as good as investors wanted to see from the world's biggest technology services company.

IBM reported earnings of $2.61 a share in the second quarter, up from $2.32 a share last year.

Sales for the most recent period grew 2 percent to $23.72 billion, up from $23.25 billion last year.

The technology services and hardware giant was seen earning $2.58 a share on sales of $24.174 billion, according to a consensus estimate compiled by Thomson Reuters.

"The earnings surprise is great, the margins were good, but the issue really was the revenue shortfall and guidance that was a couple cents shy of consensus," said Chief Investment Officer Tim Ghriskey of Solaris Asset Management.

IBM raised its 2010 net income guidance to at least $11.25 a share. The increase represents an increase of a nickel per share over the previous guidance and reflects IBM's confidence in its ability to squeeze more profit out of its workhorse technology services and software divisions.

IBM's gross margin for the period was 45.6 percent, up slightly from 45.5 percent.

Its new services contracts declined year-over-year in the quarter, however, dropping 12 percent to $12.3 billion.

"The company is struggling to find good growth opportunities ... Revenues were less than people were expecting," said Brian Marshall, an analyst with Gleacher & Co. "Service signings were $12.3 billion and I was looking for service signings of $14 billion—that was a pretty low number."

Still, the IBM-watcher said a tough quarter was "to be expected" and expressed faith in the company's prospects.

"They're moving down the right path, they're very consistent in their management approach," Marshall said.

IBM shares were down more than 3 percent after the bell Monday. Get after-hour quotes for IBM here.

The stock, a component of the Dow Jones Industrial Average, finished the regular New York Stock Exchange session at $129.87 , up more than 1 percent.

IBM shares have fallen about 2 percent over the past quarter as investors focused on technology companies such as Apple and VMwarewhich are enjoying double-digit revenue growth.

Investors are nursing fresh worries about the economy amid signs of sluggishness in the U.S. economy's improvement and fears about the euro and the ability of the governments of Greece, Portugal and Spain figure to repay perilously high debts.

IBM gets most of its revenue from outside the U.S., so strength in the dollar has hurt the company, since deals done in other currencies have translated into fewer greenbacks.

The economic worries have influenced Wall Street's reaction to the latest numbers from other technology heavyweights.

Last week Inteldelivered its strongest quarter in the company's four-decade history, helped by surging demand for microprocessors for computer servers. The shares have barely budged.

Google'sresults leaped on momentum in Internet search advertising, and the company's hiring has accelerated. Google's stock has fallen, in part because of concerns about the weaker euro's effect on Google and the costs connected with hiring new workers.

IBM has been shifting away from commoditized hardware products in the past decade, focusing instead of software and services. It is now the world's biggest IT services provider.

- AP and Reuters contributed to this report.

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