IBM Beats Expectations in Third Quarter

Tuesday, October 18th 2005, 5:21 am
By: News On 6

BOSTON (AP) _ Restructuring efforts appear to be paying off for International Business Machines Corp., which saw third-quarter profits exceed analysts' forecasts even though revenue fell just short of predictions.

In the three months ending Sept. 30, the technology bellwether earned $1.52 billion, or 94 cents per share, on revenue of $21.5 billion.

In the same period last year profit was $1.55 billion, 92 cents per share, on revenue of $23.3 billion.

But comparisons are complicated because last year's figures included IBM's personal-computer division, which since has been sold to China's Lenovo Group Ltd. The year-ago quarter also included a one-time charge of $320 million from the settlement of a pension-related lawsuit.

Without that charge and the PC operations, the continuing operations last year earned $1.03 a share.

This year's third quarter included a $525 million tax payment that IBM made as it repatriated $9 billion in profits earned overseas. Without that charge, IBM's continuing operations showed income of $1.26 per share.

That easily surpassed the $1.13 per share that analysts surveyed by Thomson Financial had been expecting. But IBM fell short of the revenue forecast of $21.7 billion, as sales rose just 4 percent over last year's non-PC operations.

The earnings report was an important benchmark in what has been an uneven year for IBM, which has yet to completely persuade Wall Street that its strategy of selling a wide slate of ``business performance transformation services'' will dramatically transform IBM's own results.

The company's first-quarter results fell short of Wall Street's forecasts, prompting the company to cut 14,500 jobs. While the next period provided stronger earnings, IBM shares were still down 16 percent at Monday's stock market close.

IBM's chief financial officer, Mark Loughridge, said this year's job cuts helped the bottom line in the third quarter, since 90 percent of the affected employees already have left the company.

Another sign that reshuffling has made its mark is that with the low-margin PC business now out of the mix, IBM's gross profit margin was 40.6 percent in the third quarter, up from 36.5 percent last year. Not counting PCs, the company's profit margin would have been 40 percent last year.

Hardware sales rose 7 percent over last year, excluding PCs. Big Blue benefited somewhat from the September release of its new z9 mainframes, giant corporate computers that cost more than $1 million each. Lower-cost servers, though, were the segments showing growth.

Sales of services _ IBM's biggest division _ increased only 3 percent, while software saw a 5 percent revenue gain. The unit is IBM's most profitable, turning in gross margin of 87.4 percent in the third quarter.

Among the downsides was a disappointing overall performance in Asia, where revenue fell 2 percent with currency fluctuations taken into account. Loughridge said IBM would take actions to improve operations in Asia.

He also said the rising dollar could hurt IBM's sales and profits in coming quarters. Strength in the U.S. currency can make it tougher for U.S. exporters to compete in foreign markets. And it lowers the dollar value of deals in other currencies.

Still, he expressed confidence that IBM would generate double-digit growth in earnings per share in the fourth quarter.

Analyst Bob Djurdjevic of Annex Research said IBM gave investors good reason to expect a solid fourth quarter, when the company should reap a full three months of sales in mainframes and chips for video game consoles.

But he said he found IBM's services performance lackluster. Though the division booked $11 billion in contracts in the third quarter, he said that was essentially ``treading water'' from previous periods. Djurdjevic said that was especially discouraging considering the strong results recently posted by consulting competitor Accenture Ltd., raising the question of whether IBM's services arm is too big to be nimble.

In the first nine months of 2005, IBM earned $4.75 billion, $2.90 per share, on revenue of $66.7 billion. In the first three quarters of last year, profits were $4.65 billion, $2.72 per share, on revenue of $68.6 billion.