IBM's earnings strength calms tech jitters

NEW YORK Thu Oct 9, 2008 7:45am EDT

A worker cleans a wall with the logo of IBM during preparations for the upcoming CeBIT fair inside a hall in Hanover, February 29, 2008. REUTERS/Hannibal Hanschke

A worker cleans a wall with the logo of IBM during preparations for the upcoming CeBIT fair inside a hall in Hanover, February 29, 2008.

Credit: Reuters/Hannibal Hanschke

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NEW YORK (Reuters) - IBM (IBM.N) posted a higher-than-expected preliminary quarterly profit and affirmed its full-year outlook, calming some fears that the financial crisis is sparking a meltdown in technology demand.

Shares of IBM, the world's largest computer services company, rose 6 percent on the news, which also bolstered other technology shares that have been hammered on fears that a global recession would crush corporate IT spending.

"It is very nice to see some positive news, not just for IBM but for -- to a degree -- the tech space overall, given the downdraft we have seen in recent weeks," said Chuck Jones, technology analyst for Atlantic Trust Private Wealth Management, which manages $16 billion of assets.

But he and other investors were wary of calling a bottom for the battered tech sector, pointing to pockets of weakness such as the warning on Monday from European software giant SAP AG (SAPG.DE) that it had seen a sudden drop-off in sales.

"In this market you are gun-shy about everything. It is hard to have a lot of conviction about anything out there," he said, but added, "This also can be a good time to buy stocks. When things look the bleakest, this is a good time to put some money to work."

International Business Machines Corp said on Wednesday its third-quarter net income jumped 20 percent to $2.8 billion as revenue rose 5 percent to $25.3 billion, including 3 points from currency benefits.

Earnings per share from continuing operations rose to $2.05, compared to $1.68 a year earlier, IBM said.

Analysts were looking for earnings of $2.01 per share on revenue of $26.5 billion, according to Reuters Estimates.

Chief Executive Samuel Palmisano said in a statement that IBM was confident about its 2008 outlook, citing a steady base of recurring revenue and profits, and investments for growth in emerging markets.

"For companies to be reaffirming their outlook through the end of the year is h-u-g-e," said Mike Holland, chairman of investment company Holland & Co, who oversees assets in excess of $4 billion, including IBM.

"In this environment, the combination of meeting current expectations but also reaffirming their outlook is an incredible performance," he said. "You made my evening," he told Reuters after getting the news.

IBM AS SAFE HAVEN

IBM has been one of the bright spots in technology this year as the Armonk, New York-based company gets about two-thirds of revenue from outside the United States.

Although a quarter of revenue comes from the hard-pressed financial services sector, IBM enjoys recurring income from services and software contracts that account for about half its business, providing a buffer during sharp economic downturns.

In the second quarter, IBM's profit had blown past Wall Street expectations and it had raised its 2008 profit per share forecast to at least $8.75, or 22 percent year-on-year growth.

Many investors had viewed IBM shares as a safe haven earlier this year, but the stock has been pummeled in recent weeks along with other tech shares and the broader market.

"Since the stock was at $120 three weeks ago and is now at $90, clearly investors were really worried about the technology market," said Kim Caughey, senior analyst at Fort Pitt Capital Group. "For IBM to have done pretty well in the third quarter and affirm the full-year guidance is a good sign."

Caughey, whose firm owns IBM shares, said they had been buying tech shares in recent days: "It's been my sense all along that this is not a tech problem. This is not 2001."

IBM shares, which had fallen 5.33 percent to close at $90.55 on the New York Stock Exchange earlier on Wednesday, rose to $96 in after-hours trading.

Shares of rival Hewlett-Packard (HPQ.N) rose 3 percent, Dell DELL.O rose 2 percent, while Oracle ORCL.O and Microsoft (MSFT.O) gained about 1 percent.

IBM is scheduled to post quarterly results on October 16. The unexpected preliminary report on Wednesday comes on the eve of the lifting of a U.S. Securities and Exchange Commission ban on short-selling of more than 950 stocks, including IBM. The end of the ban has concerned some investors.

IBM also said its gross margin in the third quarter improved to 43.3 percent from 41.3 percent a year earlier. Its pretax income rose 19 percent to $3.9 billion.

While some analysts noted that IBM's revenue was a little weak after excluding currency benefits, they also noted that the company has controlled costs.

"Earnings were solid, revenues were weak. That's probably a good sign but a problem overall for the global economy," said Tim Ghriskey, chief investment officer, Solaris Asset Management.

(Additional reporting by Eric Auchard, Gabriel Madway and Peter Henderson in San Francisco and Daisuke Wakabayashi in Seattle; Editing by Bernard Orr)

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