After profit, IBM 'appears recession-proof'

Sales slip, but services strong

The Associated PressJuly 17, 2009 

— IBM blew away second-quarter profit projections and jacked up its full-year earnings forecast Thursday, a rare sign of confidence from a major corporation in the recession.

Even though IBM's sales are slipping, the results demonstrate the technology company's belief that it can continue wringing more profit from its services and software divisions. IBM, which employs more than 10,000 in the Triangle, has been relentless in cutting costs by automating tasks and shifting labor to cheaper locales, while protecting prices. Earlier this year, it laid off more than 300 workers at its Research Triangle Park campus as part of its global belt-tightening.

The 2009 profit forecast went to at least $9.70 per share, from $9.20 per share, a target that IBM set in January. IBM earned $8.89 per share last year.

"Big Blue appears recession-proof," Annex Research analyst Bob Djurdjevic wrote via e-mail.

IBM regularly buys back its stock -- which is one way to improve earnings per share, because it reduces the company's share count. That step alone boosted IBM's earnings per share by 42 cents last year. But IBM's chief financial officer, Mark Loughridge, said in an interview that the company won't need to accelerate buybacks to meet the newly raised forecast.

IBM said profit in the latest quarter, which ended June 30, rose 12 percent to $3.1 billion, or $2.32 per share. Analysts expected $2.02 per share.

Meanwhile, sales dropped 13 percent to $23.25 billion, lower than the $23.59 billion predicted by analysts polled by Thomson Reuters. Sales would have been down 7 percent without currency fluctuations.

"We are optimistic about how IBM is positioned to make the most of current growth opportunities as well as those that emerge as the economy recovers," IBM's chairman and chief executive, Sam Palmisano, said in a statement.

Shares of Armonk, N.Y.-based IBM rose $1.63, 1.5 percent, to $112.27 in extended trading after the earnings report. The stock had closed regular trading at $110.64, up 3.2 percent on the day.

IBM's results don't mean overall corporate technology spending has rebounded.

IBM's report showed that its services and software divisions were the stars, while hardware lagged. Pre-tax income rose 23 percent in services and 24 percent in software. IBM says those divisions can prosper in down times because they help make customers more efficient.

Hardware, which includes mainframe computers and servers -- things that are easier for companies to put off in rough times -- posted a 26 percent plunge in revenue to $3.9 billion.

IBM's services signings, reflecting revenue that mainly will be booked in future quarters, fell 5 percent to $14 billion in the second quarter.

However, analysts also closely eye IBM's services backlog, which is the total value of work IBM has under contract and has yet to complete. One reason the backlog can fall is if customers are renegotiating contracts to cut costs. IBM said its backlog stands at $132billion, $8 billion higher than at this point last year.

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