IBM results blow past expectations, services strong

NEW YORK Tue Jan 18, 2011 6:16pm EST

A man walks past the headquarters of IBM Japan in Tokyo March 18, 2010. REUTERS/Toru Hanai

A man walks past the headquarters of IBM Japan in Tokyo March 18, 2010.

Credit: Reuters/Toru Hanai

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NEW YORK (Reuters) - International Business Machines Corp's quarterly profit blew past Wall Street estimates, and a long-hoped-for recovery in its services business raised optimism that global companies were confident enough to spend more on technology.

IBM shares rose 2.7 percent after-hours after the company reported fourth-quarter net income rose 9 percent to $5.3 billion. Its earnings per share (EPS) of $4.18 easily exceeded its $3.59 of the year-earlier quarter and Wall Street's average forecast of $4.08, according to Thomson Reuters I/B/E/S.

Investors were particularly relieved with the pick-up in services contracts, an early indicator of future revenue from outsourcing and other IT projects.

"One of the key issues for IBM was the services area, and I think that was a big concern for investors," said Channing Smith, portfolio manager at Capital Advisors.

IBM, which has been shifting its focus from commoditized hardware to higher-margin services and software over the past decade, said it signed services contracts worth $22.1 billion during the quarter, up 18 percent.

Analysts also noted $142 billion worth of backlog in the services business, up $5 billion from a year earlier -- a sign of strong revenue growth ahead.

"It's an indication of increased spending for the IT sector. As goes IBM so goes corporate America these days," said Annex Research analyst Bob Djurdjevic.

IBM forecast 2011 EPS of "at least $12.56," up from $11.52 in 2010, and said it was on track to achieve its operating EPS target of $20 by 2015.

Its gross profit margin rose to 49 percent from 48.3 percent a year earlier.

"We think that the risk-reward here is pretty attractive and we see fairly limited downside to IBM," said Smith at Capital Advisors. He said he saw room for the shares to rise, but not too much more than the overall market.

(Graphic on IBM and its peers r.reuters.com/sac96r)

IBM's price-to-earnings ratio of 12 lags behind multiples of around 14 for both Oracle Corp and Accenture but is higher than those of Dell Inc and Hewlett-Packard Co.

The company's quarterly revenue rose to $29.0 billion from $27.2 billion, higher than the market's forecast for $28.3 billion.

Sales rose throughout the business, with systems and technology revenue up 21 percent and its software revenue excluding its divested operations up 11 percent.

Revenue from its "System z" mainframe business soared 69 percent, helped by a new line of products.

The shares rose to $154.80 after closing earlier on Tuesday at $150.65, up 5.5 percent from 3 months ago.

(Reporting by Ritsuko Ando; Editing by Gary Hill)

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