A cure for IBM's Big Blues

[notiCIas]

A cure for IBM's Big Blues

Technology giant recovers after first quarter earnings miss. Stock heads higher.

July 18, 2005: 5:37 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - It looks like Wall Street has forgiven IBM for its stunning first-quarter earnings miss in April.

IBM, one of the world's largest technology companies, reported much better than expected sales and profits for its second quarter, results that helped send IBM's stock up more than 4 percent in after-hours trading. Shares of Dow component IBM (Research) fell slightly in regular trading on the New York Stock Exchange Monday.

The company reported earnings per share of $1.12 a share, nine cents better than expected, and an increase of 11 percent from a year ago. This figure included the cost of stock options to employees but excluded gains from the sale of its personal computer business to Lenovo Group and a legal settlement with Microsoft as well as a charge due to layoffs that were announced in May.

IBM also reported revenue of $22.3 billion, ahead of the $21.9 billion in sales that analysts were expecting. Excluding revenue from the PC business, sales increased 6 percent from a year ago.

By way of comparison, IBM reported earnings in the first quarter that were five cents below estimates and sales were up just 3 percent from the same period last year, also below consensus forecasts.

"This looks like a good quarter. It's a huge beat," said Richard Williams, an analyst with Garban Institutional Equities.

No longer feeling blue

Investors appear to have been especially pleased by the fact that IBM's most profitable businesses, services and software, bounced back after a sluggish first quarter.

IBM's services division, which accounts for more than half the company's total revenues, posted a sales increase of about 6 percent from a year ago. More importantly, the much-watched contract signings number for that unit came in at $14.6 billion, well ahead of what many analysts were expecting.

"We thought they would have a good quarter but it looks like they had an excellent quarter," said Mark Stahlman, an analyst with Caris & Co. "With these bookings numbers you have to toss out any idea that IBM is losing ground in services. They are probably picking up market share."

Sales in Big Blue's software division, which account for nearly 20 percent of IBM's overall revenue, increased more than 10 percent from a year ago.

"IBM returned to form in this quarter. In particular, strategic, high-growth businesses -- in Business Performance Transformation Services, software and in key industry sectors and emerging markets -- were among our best-performing operations," said IBM chairman and chief executive officer Samuel Palmisano in a written statement.

Is the recovery real or temporary?

During a conference call with analysts, IBM chief financial officer Mark Loughridge added that the company saw improving demand in Europe, an area that the IBM said was notably weak during the first quarter. Most of the nearly 15,000 job cuts that IBM announced earlier this quarter took place in Europe.

Despite the good news, some analysts questioned Loughridge during the call about whether or not IBM's healthy second-quarter was merely a bounce back following the weak first results or a sign that the second half of the year would be strong.

But Loughridge said that thanks to the combination of increasing demand and cost cutting, he thought analysts' estimates for the second half of the year were "reasonable."

According to Thomson/First Call, analysts expect earnings per share of $1.12 a share in the third quarter and $1.84 a share in the fourth quarter. Loughridge did not discuss Wall Street's sales targets. Analysts are forecasting revenue of $21.6 billion in the third quarter and $25.7 billion in the fourth quarter.

IBM is the latest tech company to report stronger than expected results. Last week, semiconductor company Advanced Micro Devices (Research) and iPod and Mac maker Apple (Research) also posted better than anticipated numbers in their most recent quarters.

Shares of other large tech companies, including IBM competitors Microsoft (Research), Oracle (Research), Dell (Research) and Hewlett-Packard (Research), all rose in after-hours trading following the release of IBM's news. Microsoft will report results later this week, as will semiconductor industry leader Intel (Research) and search engine giants Yahoo! (Research) and Google (Research).