IBM Shares Up After Posting Bigger Profit

BOSTON (AP) _ Shares of International Business Machines Corp. jumped Tuesday after the technology bellwether's second-quarter earnings beat Wall Street's expectations, providing evidence that Big

Tuesday, July 19th 2005, 10:45 am

By: News On 6

BOSTON (AP) _ Shares of International Business Machines Corp. jumped Tuesday after the technology bellwether's second-quarter earnings beat Wall Street's expectations, providing evidence that Big Blue has rebounded from difficulties early in the year.

Shares of IBM rose $2.34, or 2.9 percent, to $84.15 in morning trading on the New York Stock Exchange. The company released its earnings report after financial markets closed Monday.

``IBM returned to form in this quarter,'' Chairman and CEO Sam Palmisano said in a statement.

IBM on Monday said that for the quarter ended June 30, net profit was $1.83 billion, or $1.12 per share, compared with $1.74 billion, or $1.01 per share, in the previous year.

Second-quarter revenue was $22.27 billion, down 4 percent from $23.10 billion a year ago.

However, those comparisons are skewed because the sale of IBM's personal computer division to China's Lenovo Group Ltd. closed on May 1, with two months to go in the quarter.

Looking only at continuing operations, IBM showed a profit of $1.85 billion, $1.14 per share. And without the one month of sales in the PC business, IBM's revenue would have been about $21.70 billion.

Analysts surveyed by Thomson Financial had forecast earnings of $1.03 per share on revenue of $21.96 billion.

IBM's report was highly anticipated because IBM's first-quarter earnings of 84 cents per share, or 85 cents on a recurring basis, were short of the 90 cents in analysts' forecasts.

At the time, some analysts said the gap would have been even bigger had IBM not misled Wall Street about the effect of expensing employee stock options. IBM denied wrongdoing; the Securities and Exchange Commission is investigating.

One of the weak spots blamed for the first-quarter results was the tech-services division, which provides more than half of revenue. In the second quarter, however, services revenue increased 6 percent, or 4 percent without currency fluctuations. Gross profit margins in the segment also improved, to 26.1 percent from 24.4 percent a year ago.

Services contracts signed in the quarter, another closely watched figure, increased to $15 billion, ending what IBM's chief financial officer, Mark Loughridge, said were six consecutive quarters of declines. Loughridge said IBM had not offered ``extraordinary'' price breaks or other incentives to win the business and overcome the soft first quarter.

Software revenue increased 10 percent, 7 percent without currency shifts. The hardware business, now shorn of the low-margin PC line, saw non-PC revenue increase 5 percent, or 4 percent without changes in the value of the dollar.

``Not only has their business bounced back, which was expected, but above and beyond that, they appear to be doing a better job executing, and demand seems to be improving in some areas of their business,'' said analyst Richard Petersen of Pacific Crest Securities.

The second-quarter figures included three big one-time events. IBM showed a gain of $1.1 billion from the Lenovo sale and a $775 million boost from an antitrust settlement with Microsoft Corp. Those were nearly canceled by a $1.7 billion charge to account for IBM's elimination of up to 14,500 jobs, primarily in Europe.

The company earlier had said the job cuts would top out at around 13,000. Loughridge said about half the affected people already have left the company.

In the first half of 2005, IBM earned $3.23 billion, $1.96 per share, on revenue of $45.18 billion. The comparable figures for 2004 were net income of $3.10 billion, $1.80 per share, and revenue of $45.27 billion.

Loughridge said analysts' forecasts for the rest of this year ``remain reasonable,'' though he said second-half revenue could be hurt if the dollar continues to strengthen against the euro. Strength in the U.S. currency can make it harder for U.S. exporters to compete in foreign markets, and it lowers the dollar value of deals in other currencies.

IBM might also face a one-time tax charge of about $450 million if it takes advantage of a 2004 law that would let the company repatriate income earned overseas. IBM had said it would repatriate about $8 billion, but Loughridge said the company hoped to increase that to $9 billion.