IBM ($64-$69) profit down on weak demand, shares rise on forecast beats by 3c
(Recasts lead, changes headline)
By Caroline Humer
NEW YORK, Oct 16 (Reuters) - International Business
Machines Corp. <IBM.N> on Wednesday said third-quarter net
earnings fell on losses at its hard disk drive business, but a
rebound in services revenues and a rosy sales forecast drove up
Big Blue's stock in after-hours trade.
Excluding those disk drive assets, which it plans to sell
to Hitachi Ltd. <6501.T> by year end, the computer services,
hardware and software company said that its earnings per share
rose slightly as it cut costs.
Armonk, N.Y.-based IBM said revenue in its closely-watched
service division rebounded after several quarters of declines,
while hardware sales and software sales both fell.
Chief Financial Officer John Joyce backed analyst estimates
for earnings and revenue in the fourth quarter, saying that
while he won't forecast the economy, he believes IBM can
increase revenues from the third quarter by 12 percent.
Shares in IBM jumped, rising 7.5 percent in after hours
trading to $69.80.
Wall Street is watching closely for signs of a seasonal
pick-up in demand for technology during the fourth quarter and
bracing for the opposite -- that corporations concerned about
profits won't make their usual year-end purchases.
Customers remain cautious about signing large services
contracts and the environment is tough, Joyce told analysts on
a conference call, but he said "customers are still spending."
Investors said they were relieved that the company's
services revenues reversed its downward trend and gained about
2 percent, particularly after rival Electronic Data Systems
<EDS.N> issued a shock profit warning last month. Services
account for more than 40 percent of revenues at IBM, more than
any other division.
"They managed to do $9 billion in signings of new services
business and we are satisfied with that, particularly given the
tough environment and the warning from EDS," said John
Rutledge, portfolio manager for the Evergreen Technology Fund.
NET INCOME INCLUDING DISCONTINUED OPERATIONS FALLS
IBM said its net income including its hard disk drive
business was $1.3 billion, or 76 cents per share, down from
$1.6 billion, or 90 cents per share, a year earlier.
Discontinued operations contributed a loss of $381 million, or
22 cents per share.
Third-quarter revenue from continuing operations, which
excludes the hard disk drive business, was up slightly at
$19.82 billion compared with $19.78 billion a year earlier.
Analysts had expected revenue of $19.72 billion, according to
Thomson First Call.
Profit excluding those disk drive operations rose to 99
cents per share from 97 cents per share a year earlier.
That's the number Wall Street says its watching.
"They beat our revenue estimate by $100 million and EPS
estimate by 3 cents and reconfirmed revenue and EPS guidance
for the fourth quarter at the same time," said Dan Niles, an
analyst at Lehman Brothers, who upgraded the stock last week.
IBM was expected to report earnings of 96 cents per share
within a range of 90 cents to $1.02 per share, according to
Thomson First Call.
The consensus of analyst estimates for the fourth quarter
is for earnings per share of $1.35, with a range of $1.24 to
$1.58, with 20 brokers polled by Thomson First Call. They see
revenue of $22.09 billion within a range of $20.97 billion to
$23.52 billion.
Joyce said that the purchase of PwC Consulting would add
about $1 billion to revenues in the fourth quarter and will
result in a charge of about 30 cents per share.
John Jones, an analyst at Soundview Technology, said it was
a strong quarter, as IBM controlled costs and took market
share. IBM cut about 15,600 jobs during the second and third
quarters and also said it would close some microchip capacity.
He pointed to positives in the company's hardware business,
where the 1 percent revenue decline was a smaller fall than in
recent quarters. Servers that run the popular Unix operating
system or that use Intel Corp. microprocessors both improved.
"The one negative was software, and that was a surprise,"
Jones said. Software sales fell 3 percent as its Lotus, Tivoli
and operating system products waned.
Investors said IBM shares, which have been under pressure
due to the technology downturn, could rise on Thursday.
"I'm impressed in this environment that their earnings are
up. Apparently their cost cutting and attention to margins are
paying off for them," said James Luke, director of growth
equity management at BB&T Asset Management, which owns IBM.
"The stock can move up from here."
IBM shares closed on the New York Stock Exchange at $64.90.
Shares have fallen about 46 percent so far this year, compared
with a 44 percent decline in the broader American Stock
Exchange Computer Hardware Index <.HWI>.
(Additional reporting by Nicole Volpe, Reshma Kapadia and
Siobhan Kennedy)
((Caroline Humer, New York Technology Desk, 1 646 223-6180,
caroline.humer@reuters.com))
REUTERS
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