U.S. News

IBM Profit Rises on Software, Services But Shares Decline


IBM , the world's largest technology services company, said after markets closed Thursday that quarterly profit rose, helped by a string of software-company acquisitions and big services contracts.

IBM posted fourth-quarter earnings of $2.26 a share before special items, surpassing a Thomson Financial consensus estimate of $2.19 a share. IBM earned $2.11 a share in the fourth quarter of 2005.

IBM profits reached $3.541 billion in the most recent quarter, up from $3.187 billion in the same period last year. Revenue rose 7.5% to $26.257 billion.

The company has been expanding in software, its most profitable business, and last year bought 11 software providers including Internet Security Systems and FileNet.

IBM said it signed services contracts in the quarter totaling $17.8 billion, marking a year-over-year increase of 55%. Technology services signings recovered after slumping earlier in 2006, as IBM won deals from the German military and Vodafone Group.

Despite the good results, IBM shares fell 5.2% to $94.24 in after-hours trade from a New York Stock Exchange close of $99.45. A Nasdaq index of computer hardware stocks fell 2.4% on Thursday on disappointing forecasts this week from top computer chip maker Intel and iPod maker Apple.

"In the last 5 months it has added $37 billion and it was up 33%, and that prices in a lot of good news," said Jerome Heppelmann, chief investment officer at Liberty Ridge Capital. "And the whisper numbers were fairly high as well, and from what I can tell, it just came in at the whisper. It didn't beat the whisper. It looks like it was a great quarter -- but that was priced in."

IBM shares, up 21% in the last 12 months, trade at about 15 times expected 2007 earnings per share, compared with a multiple of 17 for Hewlett-Packard, which competes with IBM in computer hardware, and 20 for Accenture, a services rival.

Upbeat on 2007 Earnings

IBM is on track to increase its 2007 earnings per share by a low-double digit percentage rate, the company's chief financial officer said on Thursday, reaffirming IBM's long-term outlook.

"We would expect earnings per share for 2007 to again be in line with our longer-term model," Chief Financial Officer Mark Loughridge told investors on a conference call following IBM's year-end financial report.

IBM's long-term financial model is for earnings per share to increase 10% to 12% per year, Loughridge said, based on annual revenue growth of around 5% to 6%.

Using the top end of current analysts' expectations, Wall Street is looking for revenue growth of 6.1% during 2007 to $96.99 billion, up from the $91.42 billion the company reported in 2006, according to Reuters Estimates.

Analysts are looking for 2007 net profit to rise 5%, on average, to around $9.96 billion, according to Reuters Estimates, compared to 2006 annual earnings of $9.49 billion.