IBM Profit Rises 8% on Strength in Software Business

First-quarter earnings at International Business Machines rose 8% and matched Wall Street expectations, as a boost from software acquisitions helped overcome only moderate growth overall.

In the first three months of this year, traditionally IBM's slowest quarter, the Armonk, N.Y.-based company earned $1.84 billion, $1.21 a share. In the comparable period last year IBM showed profits of $1.71 billion, or $1.08 per share.

Analysts surveyed by Thomson Financial were expecting $1.21 a share for the first quarter.

IBM's revenue rose 7% to $22.0 billion, slightly ahead of the analyst forecast of $21.9 billion.

But the real growth in sales was more moderate -- 4%, if not for weakness in the dollar. Downdrafts in the U.S. currency can inflate the dollar value of deals done in other currencies.

The first quarter's results followed a well-established pattern at IBM , which has used cost cuts and measures such as stock buybacks to squeeze out earnings gains that have exceeded revenue increases. Last year, profits jumped 20% to $9.5 billion despite virtually flat revenue, and investors pushed the stock up 18%.

But this year the shares have treaded water, as investors are scanning for signs of a new spark inside IBM. Shares rose 94 cents to close at $97.12 on the New York Stock Exchange before the earnings report, almost exactly the price they had when the year began. In extended trading after the earnings report, IBM shares gained $1.83, or 1.9%.


IBM's most closely watched unit, the company's services division, signed $11.1 billion in contracts in the first quarter, compared to $11.4 billion a year ago.

That figure -- one of Wall Street's favorite barometers for gauging IBM's health -- represents revenue that will be booked over the course of several years. In the first quarter itself, the services division's revenue rose 8% to $12.4 billion. It would have been a 4% gain at constantcurrency rates.

IBM's next-biggest arm, the hardware unit that makes servers, mainframes and computer chips, saw revenue rise 2% to $4.5 billion, though the figure would have been flat if not for currency fluctuations. Revenue in software, which accounts for an outsized portion of IBM's profit, grew 9% to $4.3 billion, helped by several acquisitions in the past year.

IBM did not immediately address analysts' full-year expectations, which call for earnings of $6.72 per share and sales of $95.6 billion.

The computing giant reported a profit of $1.844 billion, up from $1.7 billion in the first quarter of 2006.

IBM's first-quarter revenue came in at $22 billion, slightly ahead of estimates of $21.9 billion, and compared with $20.66 billion in the comparable period last year.

"Looks like the numbers seem pretty decent," said Sunil Reddy, senior portfolio manager at Fifth Third Asset Management. "The revenue number ... was actually slightly ahead of consensus. The worry going into the quarter was sluggishness going into server spending but the fact that IBM pulled off the quarter shows that the diversified portfolio of business is working."

Shares of IBM rose almost 2% in after-market trading.