IBM Tops 2Q Profit Targets, Points to Signs of IT Recovery

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IBM topped analysts’ estimates in its second quarter and raised its profit estimates for the remainder of the year, a clear sign that Big Blue is certain that the economy is in the midst of a significant recovery.

After several quarters of tentative industry-wide growth, IBM’s report is good news for the IT sector as a whole, for which the company serves as one of its most closely watched bellwethers.

In fact, IBM revised its full-year profit estimate upward to “at least $11.25 a share,” up $0.05 a share from most analysts’ current estimates and up $0.25 a share from IBM’s own projection back in January.

For the quarter, IBM posted a profit of $3.4 billion, or $2.61 a share, on sales of $23.7 billion. A survey of analysts by Thomson Reuters pegged IBM for a profit of $2.58 a share on sales of $24.1 billion. Company officials said its top-line results had been hampered by changes in currency rates since first quarter, clipping almost $500 million from its Q2 revenue haul, IBM said.

The technology bellwether’s upbeat quarter and outlook is the latest and perhaps most significant sign that worldwide IT spending is finally starting to pick upafter years of regression.

CFO Mark Loughridge called the revenue shortfall a product of a “significant currency headwind” and said internal hedging efforts to offset volatile exchange rates were less successful than they were in the year-ago quarter. He said net income in the quarter was probably reduced by $0.10 to $0.11 a share and cost IBM almost $500 million in total sales in the quarter.

Aside from getting the short end on international exchange rate, Loughridge was pleased about the company’s performance in the second quarter.

“This quarter, we continued our trend of improving business performance and expanding margin,” he said during a conference call with analysts. “We’ve now grown EPS in each of the last 30 quarters and grown [earnings per share] at a double-digit rate in 12 of the last 14 quarters.”

“Our growth was broad-based and across all segments and geographies, including Europe,” Loughridge said. “We’ve been extending our technology leadership in major markets and in growth markets. We took share again this quarter in software and our BI revenue was up 14 percent.”

“We have a good pipeline of deals going into the third quarter,” he added. “We expect to see margin expansion in the second half.”

Second-quarter sales in the Americas rose 3 percent to $10.2 billion while Europe/Middle East/Africa and Asia chipped in $7.4 billion and $5.4 billion, respectively.

OEM sales shot up 26 percent from the year-ago quarter to more than $677 million.

Total services revenue increased 2 percent in the quarter to $9.2 billion. Its global business services group improved sales by 3 percent to $4.5 billion. IBM said it inked 15 service contracts worth more than $100 million in the quarter and exited the quarter with a services backlog of $129 billion.

Software sales improved 2 percent from the year-ago quarter to more than $5.3 billion, with business intelligence (up 14 percent) and WebSphere middleware products (up 9 percent) enjoying especially robust demand, Loughridge said.

“Software had a very powerful month in the third month of the quarter,” he added.

Revenue from its Systems and Technology segment rose 3 percent to $4 billion in quarter with System x sales surging up 30 percent. Loughridge said the company expects its new System z and Power Systems offerings will drive the unit’s growth through the rest of the year despite the fact that System z mainframe servers endured a 24 percent decline in sales from the second quarter of last year.

Total gross margin for the quarter was 45.6 percent, up from 45.5 percent a year earlier.

“While some companies will show growth this quarter compared to last year, our 13 percent increase in earnings per share is compared against a year-ago quarter in which we reported an 18 percent improvement in EPS,” Loughridge said. “We plan to continue to invest and expand our base of opportunity in software, hardware and services.”

Last quarter, IBM easily topped analyst estimates, pocketing $2.6 billion, or $1.97 a share, on sales of almost $23 billion.

IBM shares closed up $1.76 a share, or 1.4 percent, to $129.79 ahead of the earnings report before shedding $5.29, or 4 percent, in after-hours trading.

Larry Barrett is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.